Passive income through option writing: Part 6 – A 2018-2021 backtest with different contract sizes: Guest Post by “Spintwig”

All parts of this series:

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April 21, 2021 – Welcome to a new installment about trading options. Alongside my work on Safe Withdrawal Rates, this is my other passion. In fact, on a day-to-day basis, I probably think about shorting S&P 500 put option much more than about Safe Withdrawal Rates. In any case, one of the most frequent questions I’ve been getting related to my options trading strategy is, how do you even get started with this strategy when you have a smaller-size account? Trading CBOE SPX options, with a multiplier of 100x on the underlying S&P index, even one single contract will have a notional exposure of roughly $400,000. I don’t recommend trading that without at least about $100,000 or better $125,000 or more in margin cushion.

How would one implement this without committing such a large chunk of money? 

My options trading buddy Mr. Spintwig who already published another guest post in this series offered to shed some light on this question. He ran some simulations for my strategy using some of the other “option options” (pardon the pun), i.e., implementing my strategy not with the SPX index options but with different vehicles with a smaller multiple than the currently pretty massive 100x SPX contract. For example, the options on S&P 500 E-mini futures are certainly a slightly smaller alternative with a multiplier of only 50. And there are some even smaller-size contract alternatives, but my concern has always been that the transaction costs will likely eat up a good chunk of the strategy’s returns. 

In any case, I’ll stop babbling. Mr. Spintwig has the numbers, so please take over…


Thank you Big ERN for another opportunity to collaborate on the topic of options selling! The formal backtest of your SPX 2-3DTE 5D M/W/F strategy was well received and generated lots of discussion.

One of the questions that keep coming up from that post is: “I want to implement the Big ERN strategy (or similar) but writing an SPX put option would generate too much leverage in my account. Are there notionally smaller instruments available that I can use and what are the implications of using them?”

Yes! There are indeed smaller instruments that have identical exposure. They are, in decreasing notional size:

  • ES Futures (50x, 1/2  the size of SPX )
  • SPY ETF (10x, 1/10 the size of SPX )
  • MES Futures (5x, 1/20 the size of SPX )

Considering the S&P 500 index is trading at above 4000, then a single, short, at-the-money, or slightly out-of-the-money option contract with a 4000 strike will have the following notional exposure:

  • SPX = 400,000 USD
  • ES = 200,000 USD
  • SPY = 40,000 USD
  • MES = 20,000 USD

An entire post explaining the differences between these instruments can be written, and I’ll save that for another time. For our purposes today, we’ll focus on just one aspect: commissions.

Short option strategies that are far out of the money, defined as 5-delta or lower, generate a low amount of premium relative to higher-delta strategies. No worries though. On a hypothetical 5-delta 3700 SPX 0DTE short put, one might generate $200 in premium.

If it costs $1.32 in commission to open the position and we assume 55% premium capture over the long run (this is what Big ERN’s strategy averaged), commissions represent 1.20% ( 1.32 / [ 200 * .55 ] ) of the strategy income. Not bad. For context, most PayFacs (Square, Wave, Lightspeed, PayPal Here, etc.) charge between 2.60% and 2.90% + $.30 per transaction and direct merchant accounts are in the 1.8% range.

Suppose we do the same trade on SPY. SPY is one-tenth the size of SPX. A middle-of-the-road commission cost for SPY at the time of writing is $.70 for a single contract. All things equal, a comparable 5-delta 370 SPY 0DTE short put might generate $20 in premium. This represents a 6.36% ( .7 / [ 20 * .55 ] ) commission drag. That’s quite a bit more.

We can do this napkin-math exercise on each underlying, proposing hypothetical premium capture amounts, calculating commission drag, then call it a day. But that’s not how BigERN or I roll. Let’s do a formal backtest and explore each underlying, holding all variables constant except for commissions, and see what happens.


Strategy Details

A few notes:

  • Position count and premium received/paid are scaled to ensure consistent notional exposure across instruments
  • Strategy Start Date is 2018-03-01 for two reasons:
    • Monday-expiring weekly options on SPY were introduced on Feb 21, 2018 – see SEC release 34-82733. Prior to this date, the Big ERN strategy as it’s implemented today could not be executed.
    • Mar 1 2018 allows for a clean comparison against the buy/hold benchmark.
  • The simulation runs through March 2021.
  • Tolerances around the delta target are used because there are few occurrences of exactly 5-delta positions. Despite the +/- 4.5D tolerance, all trades were +/- 1D.
  • Max Margin Utilization Target: 50% | 2.5x leverage. Average margin utilization may be lower. This approximates the leverage Big ERN currently uses.
  • Comprehensive details on how each stat is calculated can be found here.

More assumptions

  • Margin requirements are always satisfied
  • Margin calls never occur
  • The margin requirement for positions is 20% of the notional
  • Early assignment never occurs   [ERN: they shouldn’t for the options on futures because they are European options, but theoretically, the SPY options could be assigned before the expiration!]


  • Prices are in USD
  • Prices are nominal (not adjusted for inflation)
  • Margin collateral is invested in 3mo US treasuries and earns interest daily
  • Assignment P/L is calculated by closing the ITM position at 3:46 pm ET the day of expiration/position exit
  • Commission to open, close early, or expire ITM is:
    • 1.32 USD per contract, all in, for SPX
    • 1.42 USD per contract, all in, for /ES
    • 0.70 USD per contract, all in, for SPY
    • 0.47 USD per contract, all in, for /MES
  • Commission to expire worthless is 0.00 USD per contract
  • Commission to open or close non-option positions, if applicable, is 0.00 USD (think assignment)
  • Slippage is calculated according to the slippage table; 0.5 = midpoint, 1.0 = market maker’s price
  • Starting capital for short option backtests is adjusted in $100 increments such that max-margin utilization is between 80-100%, closest to 100%, of the max-margin utilization target.


Starting Capital and Leverage

Hindsight bias was used to identify the necessary starting capital to realize the max-margin utilization target.

The average daily margin utilization drifts higher across the strategies. As we’ll see in the below sections, this is due to fewer dollars being in the account due to the increased commission drag.

Win Rate

As expected, the win rates are identical across the strategies. There were 418 independent trades placed. Each trade ranged from 1 contract (SPX) to 20 (/MES).

Profit and Loss

Here we see the direct impact of commissions on P/L.

Commissions as a percentage of total P/L range from 1.77% to 12.63% for SPX and MES, respectively. That’s a difference of over 7x.

Margin collateral is in the form of cash earning daily interest commensurate with the 3mo US T-bill. The greater commissions caused fewer dollars to be available earning interest. This resulted in a small but measurable ding to interest income. Your implementation mechanics may vary.

Performance Stats

The drag on P/L is observed across all metrics driven by portfolio value – lower CAGR, lower Sharpe, etc.

Risk Management

Again, metrics based on portfolio value are negatively impacted due to the increased P/L drag.

Cumulative Returns

(normalized to $100k at t=0)

The >10% drag on CAGR between SPX and MES appears nominal. However, as the duration of the study increases the impact will become more apparent.


It’s difficult not to focus on the prospect of paying over 12.5% to do business. Retail brokers will love you, no doubt. Selling a home using a realtor is in the neighborhood of 6%. Credit cards that charge for currency conversions levy about 2.7%. But this ignores the other factors at play between these instruments which may offset costs.

Without going into too much detail, a trader would be prudent to understand the implications of:

  • Option Style – American vs European
  • Option Settlement – SPY stock, cash, or ES MES contract
  • US Taxation Differences – short-term capital gains vs Section 1256 contracts
  • Relative Liquidity – spread widths, fill quality, and ability to “get out”
  • Hours Traded – 9:30-4:15pm ET vs near-round-the-clock
  • Margin Requirements – Reg-T vs SPAN

Implementing the Big ERN strategy using notionally smaller instruments is viable but it may be more cost-effective to transition to a larger instrument if/when funds allow.

Back over to Big ERN for his thoughts and observations.

Ern’s Conclusion

Thanks, Spintwig, for doing this! I’m positively surprised that my strategy involving so much trading activity (three trades a week) is at least mildly profitable even for some of the smaller contract sizes. I would not recommend running this permanently on such a small scale if the drag is more than 80bps p.a. But “getting your feet wet” and learning your way around trading options for a year or two until you move on to the “Big League” and running this with an SPX contract (or ten) with $150,000 in margin each seems like a path most readers can take. When I started with my strategy in 2011, the S&P was trading at only around 1,300 points, so the contract size was a bit more manageable (and I used the E-mini, 50x contract at that time). If I remember correctly, the initial margin was somewhere in the $5,000 to $6,000 range. I had it so much easier than all of you young folks out there! 🙂

Let me also add a few more thoughts on the return stats:

  • I have generated slightly more profit with my strategy in real-time, likely because I do a little bit of extra market timing, i.e., scale up the trading volume when volatility is high or I notice some other attractive opportunities.  For example, as I detailed in Part 4, I might initiate some additional trades when I see that my current short puts have a delta close to zero. This could be same-day trading (e.g., on Wednesday sell more Wednesday options if the current lot of options expiring that day are significantly OTM), or off-day trading (e.g., on Tuesday sell more Wednesday options if my current lot of Wednesday options already has a close-to-zero delta), and a few other techniques. Scaled to one short-put, I made just above $33,000 instead of the simulated roughly $27,000. So, you can potentially do a little bit better, albeit with the additional risk that comes with it.
  • I also take a bit more risk with my margin cash. While Spintwig assumed about $5,400 in additional income from money-market-level interest in the margin account (close to zero for the most part), I’ve made much more with my strategy. See Part 3 of the series, Section 3: “Taking more risk with the margin cash.” Scaled to one short-put, I made about $25,000 in that 3-year time span. Yup, that’s not a typo, this is both from interest and dividends (5+% for the most part in tax-free closed-end fund Muni funds and 6+% in some of the Preferred Shares I own) and some capital gains because interest rates went down since 2018 and there has been a mad rush into everything yielding anything.

I just mention all this because some financially no-so-savvy critics will object “what’s the point of the strategy if you lag the stock market?”   Granted, if you just start investing, you’re probably better off just going with the good old equity index fund. But once you get closer to FIRE and certainly when you live off your assets during FIRE, you are looking for less-volatile investments, especially investments with mild and shorter-lasting drawdowns to hedge against Sequence of Return Risk. I think this put option strategy fits very nicely into that niche and it’s exactly why my wife and I rely heavily on the income from the put options strategy in our own retirement. 4% annualized volatility, only about one-fifth to one-fourth of the S&P 500 looks pretty amazing! Of course, for full disclosure, by holding risker assets in the margin portfolio, we faced higher volatility. But achieving equity-like returns we still had only half the equity volatility. About 35% of our net worth currently funds our entire retirement budget. Pretty sweet!

Addendum: my current margin cash asset allocation:

This was requested from Mr. Spintwig in the comments section and I will post this in the main part because more people might be interested in this:

Asset allocation:

  • 16%: Muni Bond Fund BCHYX
  • 40%: Nuveen Muni CEFs: NMZ, NVG, NZF
  • 7%: other Muni CEFs: BLE, BTA, IQI, MHD, MQY
  • 4%: cash

Most of the Preferreds have variable rates (but some are still in fixed-rate mode and will transition to variable rate linked to LIBOR later). Most are non-cumulative.

Hope you enjoyed today’s post! Looking forward to your comments and suggestions!

Title Picture Credit:

126 thoughts on “Passive income through option writing: Part 6 – A 2018-2021 backtest with different contract sizes: Guest Post by “Spintwig”

  1. I started small and delta about .02 for about six months. I went up .05 and sometimes .10. and everything is going fine. I got nailed here and there but very rarely. In the big picture it is really irrelevant.

    The strategy works and I am up to much large amounts now – six figures and the first number is it not number one.

    For anyone knew out there. Outside of statical proof, which is great. There is also an art to it as well – meaning when do take it easy per se and when do you push forward meaning how you control delta.

    I am extremely thankful for this strategy as it fits my style “protect the corpus at all times”

    P.S. If you are wrong – someone will happily steel you money very very fast. So, be very careful.

  2. I’ll add that the prospects of running this strategy with a small account outside the States are even grimmer than this post (which is excellent as always) lets on. I live in Germany (Servus ERN!) and here IB charges $1.5 per SPY contract. So $0.7 sounds amazing relatively to what we got here. In comparison, in Israel, which is where I also run an account, IB charges $2 per contract and that is considerably lower than any other Israeli broker.

    On a different note, ERN, you write that you always prefer cash-settled options since you don’t want to get “stuck” with the underlying in your portfolio. I completely understand your rationale. But what about someone young (like me) who still has 2 decades at least until FIRE and wants to buy stocks at lower prices. Do you think it’s a good strategy to get money into the market? I mean, if you’re running this strategy, you are going to get assigned at some point in the future; so why not use this to your advantage and view writing SPY options as a buy limit order? Or do you think that since the general trend in the market is up you’ll be better off just dollar averaging your way in? I would be grateful for your thoughts on this.

    1. Well, I guess it’s not exactly comparable to a buy limit order because first, if assigned you are obliged to buy AT the strike price and not below; and second, you get paid for it (:

      1. Pleasee mindful. At least for me me. This strategy option strategy is outside of normal standard portfolio index vs bond/cash. I would calll this strategy – hey let’s collect premiums to pay for everything expenses why you get to keep your money. Also, being leveraged, you get to earn money on money that you don’t have. But let’s say you don’t have leverage. So, you cna basically add inflation to corpus on quarterly basis and move on. The problem of course with foreign trading is exchange risk and I have no clue how deal with that.

    2. Thanks and Servus zurueck nach Deutschland!
      Yeah, outside the US there’s still a long wy to go in terms of fee-compression. But you’ll get there! 🙂

      Using puts to grab stocks at a low price is a completely different strategy. and so is the covered- call strategy. I have a ton of equity investments already and don’t need to load up even more. I prefer the vol premium only with less equity exposure in my IB account.

  3. I have been doing Big Ern’s SPX put selling strategy for two years now and I have not paid any commissions on options trades during that time. I originally had my options trading account with Fidelity which gave me 500 free trades to open an options account (enough for about two years of trades).

    Fidelity has since ended free trades, so I recently moved the account to Schwab which also gave me 500 free trades. Although things could change at any moment, at least for the time being this strategy can be implemented essentially commission free.

      1. I moved it over in several batches of $100k. Took a couple weeks to complete the entire transfer.

  4. To clarify, when I refer to 500 free trades, I’m referring to waiving the $0.65 per option contract fee that Fidelity and Schwab charge. The 500 free trades, which expire after two years, waive the fee for up 20 options contracts per trade. There is still a small transaction fee of about $.01 per contract which is not waived.

  5. Thanks Big ERN! Grateful for another opportunity to collaborate 🙂

    For readers that are looking for ballpark numbers specific to their individual scenario, some quick math can do the trick.

    Suppose SPY commissions cost $2 round trip instead of $0.7. Simply find the ratio ( 2 / .7 = 2.85 ) then multiply the commission shown by that ratio ( 3031 * 2.85 = 8638 ). Most of the other stats can be derived with a similar approach.

    Big ERN, if you don’t mind me asking publicly:

    -what are the CEFs / Muni funds you’re holding?

    -are all the preferred shares “cumulative” in nature re: dividend policy?

    -what’s your asset allocation in the options portfolio for margin collateral re: equities, fixed income and cash / cash equivalents?

  6. BigErn…a great post on the cost of commissions up against P/L. I have been paper trading this Put Selling at Delta 5&6 using the /ES futures contract for over two months now. I have over 60 winning trades and zero losing trades. I prefer the /ES futures because of a medium sized account, and seeing your charts here it shows that the /ES has around the same profit potential as the SPX…but the /ES uses way less of your trading capital per each contract. I am a retired Army Colonel and this allows me to keep the risk/reward ratio in a more safer zone which suits my tolerance level way better. Thanks to you and Spintwig for taking the time to put this all together and mentor us newer traders. I look forward to reading your future posts.

    1. All noted. But keep in mind that if you hold your margin cash in ETFs, CEFs, etc. then the holdings there will count toward the SPX options. However, if you’re trading ES options, you will likely face a significant debit balance in the “commodity” portion of the account. I went through this in Part 3.

  7. ERN, Spintwig,

    Another great analysis. I especially appreciate the comparison of the back-test vs. actual anecdotal behavior. It acknowledges that we are not machines and there’s going to be variation in choices.

    I’m curious, can you elaborate on why you used SPY x10 contracts instead of XSP x10 contracts? XSP is also SPX/10, and has the benefits of being cash-settled, European, and section 1256 tax status.

    I’m assuming the results would be significantly similar to SPY (because it’s commission / premium ratio should be substantially similar). Was there another aspect that suggested SPY over XSP?

    1. I use ^XSP exclusively in a small account – I would imagine it was omitted because the slippage due to the wide bid/ask spread is substantial compared to SPY. However, I do think that the volume/filling of ^XSP options has improved over the past year.

      I prefer ^XSP because of cash-settlement, no early exercise risk, and section 1256 treatment. For me that outweighs the lower volume of XSP vs SPY. I could start doing MES or an ES but the margin treatment of securities vs. futures is a little complicated at IBKR.

      I should also note that I run this strategy juiced up a little because I’m pretty young and more open to equity risk. I run overlapping 7 DTE at 3-4x leverage at 10 delta but keep about 20% of the account in cash to deal with more frequent in-the-money settlements and to be Reg T compliant.

    2. Because I anticipated there would be fewer questions with SPY vs XSP 🙂

      Thumbs up highlighting the differences, and yes, results would be nearly identical in this scenario.

  8. Thanks for the great articles on this strategy. I live in Australia and so the time zone make this strategy quite challenging given the amount of trades. Do you know if there are any ETFs (or mutual funds) which implement this strategy?

    1. None that implement a low-delta strategy with ultra-short durations like the Big ERN strat. However, I’m aware of various “auto traders” being developed and beta tested with real-money portfolios.

      I suspect solutions such as these will become a popular tool amongst the DIY crowd.

    2. No ETF doing exactly this. There is a WisdomTree ETF (PUTW) but it does the monthly ATM puts. Too many differences and disadvantages relative to my strategy. And a 0.44% p.a., expense ratio. A non-starter.

      I remember trading options while visiting Australia and NZ in 2018. Australia was tough. You could trade at the open (11:30pm your time). Or 6am in the morning. Nothing wrong with that. Early bird gets the worm!
      NZ was much easier because the market close is at 8am the next morning. Perfect timing for me!

      If you want a really tough trading schedule, try Manila. While visiting there I had to monitor my positions at 4am in the morning. That was tough! 🙂

      1. Thanks Spintwig and Big ERN. Hopefully these auto trader solutions will come to market. Alternatively, I’ll need to wait for the Spintwig / Big ERN ETF!

          1. I would love a post on some other passive income strategies that don’t involve fancy options trading. Although it’s fun to come here and spectate, the reality is I’m just never going to have the interest or the trading chops to do things like this, and I suspect many others are equally reluctant to join Theta Gang. There are covered call ETFs (like QYLD) that claim to provide up to 11% annual dividends, but they all seem to have mixed reviews… maybe ERN could review some of these or suggest an alternative for us non-Finance PhDs.

            1. That’s like asking a car racing enthusiast to write less about cars. The series is called “Passive income through option writing” and trading options is thus part of the process.
              If there was a significantly easier process with attractive return patterns and I knew about it I would certainly implement it and write about it.

              About QYLD: yeah, they claim they have an 11% yield but only have 8.63% CAGR since inception. Part of the “yield” comes from eating up capital. And the fund has a 0.6% expense ratio. So, I don’t endorse that kind of fund.

            2. With the exception of real estate investing, most the high yield passive investments come at some sort the expense of capital gains and often under perform their more broad based index counterparts. At the end of the day, if you want to keep it simple just stick with index funds. They often kick out ~2% in passive dividends which covers most of an early retiree’s annual expenses on <4% SWR rate anyway. Many retirees who have most of their wealth in taxable accounts actually prefer low yielding investments such as growth stocks so they have more control over their taxable income since dividends are kind of like "forced" stock sales.

              1. Real Estate came to my mind, too. It’s either not exactly passive either. I use private equity funds which makes it less involved for me. But RE will not be a good fit for everyone.

  9. Would it be worth combining this strategy with *buying* puts? I was thinking of doing something:

    1) Continuously sell near-the-money, short term puts like ERN’s strategy
    2) Buy 1 or 2 very far out of the money, long term puts, just in case something really catostrophic happens

    I’m not much worried about normal up-and-down volatility, it’s the really big crashes that scare me, especially if they triggered a margin call.

    1. The strategy I use to dampen the volatility is to hold treasuries rather than corporate/muni bonds against the puts and when the big crashes happen, I roll into the riskier bonds. You give up some upside since they pay out lower interest but when things really go bad, they are about the only asset that tends to appreciate, whereas many corporate bonds and muni’s were down 10%+ in March 2020. I’m not certain that this strategy would have better long term returns than carrying riskier debt but it certainly smooths the ride.

  10. Is CAGR calculated off of the margin you need to put up, or the value at risk which is the SPX notional value? I think CAGR should be calculated off of the value at risk to do an apples to apples comparison.

    The 5 delta put for Monday 04/26/2021 is now selling today Friday 04/23/2021 for only around $80. With treasury bill rates close to 0, I don’t see the prospect of much profit.

      1. In my view, that’s the ONLY acceptable way.

        My litmus test is when you see options clowns on the web shilling 60%+ return strategies and you notice that this number is calculated off the minimum margin, stay away! 🙂

  11. This post further solidified my theory that you want to be overall net long (and long dated) volatility (LEAPs, synthetics, etc.) during periods of low volatility to protect yourself from any surprise spikes. When volatility spikes to your acceptable risk tolerance to short puts with acceptable leverage and the losses on the long dated options, or ones that are now short dated but have accumulated most of their value won’t take a significant hit.

  12. I’ve been selling SPX puts about 365DTE with a strike between 1/3 and 1/2 the current SPX price. The CAGR is lower but I think the risk is much lower than .05D and 2/3DTE and no need to trade a lot. Anyways, I will try it with 1 XSP.

    1. Miguel…your post sounds interesting. I will take a look at the SPX Puts at 365 DTE, but it seems like a 5 delta would give you a better probability to finish OTM. I assume you buy these 365 DTE Puts back within 3-4-5 months to close the trade ? Or, do you let them go all the way to expiration ? Thanks for sharing your trade methods it mentors us newer traders, and causes our brain to go into over drive.

      1. I sell puts for MAR, JUN, SEP and DEC (4 per year) between 1/3 and 1/2 the SPX price (big drops are between 40% and 60%) using 25% – 33% margin and let them expire. Premiums are low at current volatility, just a little over $11 (x100).

        1. Miguel…this is a long time to have to wait for these to expire OTM. The longest dated Puts I currently sell are 45 DTE, and I sometimes let these expire OTM…or I buy them back to close them at anywhere from 14-21 days into the trade. The Tasty Trade method is the 45DTE and buy them back at 21 days. Tasty Trade says this is what they have found to be the sweet spot for the best risk/reward return on capital at risk in each trade.

          1. I wouldn’t put too much weight on the “21 DTE or 50%” exit mechanics. Independent data suggests it doesn’t offer a statistically significant improvement for most of the KPIs with regard to SPY underlying.

            In other words, there’s no magical CAGR boost from early management. There is, however, an increase in brokerage commissions dragging on performance.

            Exception: managing a 30 or 50-delta strat at 25% max profit tends to do a little better.

            1. Spintwig…I am sure you are correct on this because you and Karsten have both completed the back testing on these Put selling strategies. You and Karsten are what we call in the Army an SME subject matter expert…and that is a compliment.

          2. I find this strategy really risky. The P&L at the end might sound like an almost safe bet. But the vol in between can wipe out a tight margin cushion really quickly. I might do a quick case study to demonstrate this issue in a short post next week.

        2. I looked at a similar contract today:
          Strike 1700 (around 0.4x today’s index)
          Expiration June 2022
          Premium ~11.50 (x100)

          The premium is miniscule as a % of the index value. only about 0.23%. To make this work for an average early retiree, you’d need a massive amount of leverage. Probably around 60-70 short put contracts in a $1,000,000 portfolio.
          That leaves around $15k of margin per contract. (initial margin=4388, so around 29% of your capital)

          If you were to have a 20% drop in the index and a +40% jump in IV over the next month (which can and has happened in the past) you would lose 60+% of your account value and you will get a margin call.
          So, the problem with all these long-term short-vol strategies is that they may look bulletproof, if you look only at the final payoff. But you have to make margin every single day along the way. A large enough equity drop short-to-medium-term can destroy the “bulletproof” strategy even if the market never drops all the way to the strike in the end,

          This kind of fallacy wiped out optionseller, by the way. See my post and especially item 1 “Ignore the Option Greeks, especially Delta, Gamma and Vega!”

          So, I certainly wish you best of luck running this. But I not do not recommend this to any of my readers.

          1. I’m assuming this person didn’t start this strategy until after Mar 2020 and feels overly confident about it “working” for the past <12 months. I tried a similar strategy to what they described, selling quarterly <0.1 delta options with 8x leverage in early 2018 to "juice" my returns when I started a weekly option selling strategy similar to yours and when the VIX went from 10 to 35 in Feb '18 I had a massive margin call wiping out 40% of my brokerage account even though the strike never was touched. It happened in the middle of the night when there was really wide option markets with almost no offers and IB seemingly used those markets to value the options that I had sold then they determined I didn't have enough equity to cover the margin and they bought them back at very high overnight prices. Luckily I was just starting out and only lost my "play money" in that account but expensive lesson learned.

  13. Some brokerage firms (Fidelity) allow you to satisfy the minimum margin requirement (around 20% of SPX notional) by keeping it in a government money market fund. Most brokerage firms require you to keep the minimum margin requirement as cash where it earns 0 or near 0 interest rates even when money market rates were much higher than they are today. How are you able to keep the minimum margin requirement in risk assets such as muni funds and preferred stocks – is this a portfolio margin thing?

    1. I use Interactive Brokers. IB allows you use your other assets to satisfy margin. That goes for mutual funds, ETFs, individual stocks, preferred shares, etc.
      Don’t ever use a broker that requires you to hold cash for the margin requirements!

  14. ERN, do you or any blogger colleagues have a covered call strategy for a diversified ETF portfolio to genereate some income? Would be interested in a ‘simpler” strategy like this and learn pros & cons. Perhaps this already exists from a blogger you’d suggest or a previous post I missed. Thanks!

      1. Have you explored the idea of short VIX Puts? Sometime the market will enter a longer decline (months or more), which would mean SPX mostly down (don’t fight the trend?) and VIX generally up.

        1. I have not considered that.
          One could do that as a hedge against a vol spike. My strategy here, selling puts on the SPX is much more in line with selling CALLS on the VIX. But that’s extremely risky! Think Feb 2018! I would never do that.

    1. I do a (very small) covered call strategy for fun with a small number of individual stocks in a Fidelity IRA. I don’t want to deal with the tax record-keeping.
      My results so far? Not good! Should have just done the underlying without the covered calls and I would have made more money. My performance lags behind because I have been whipsawed a few times.

      So, I prefer to do either the simple equity index fund to capture the equity risk premium (which I do with a large chunk of my net worth, much larger than the put writing strategy) or I do vol selling, but then you do it “right”, i.e., the way I propose it here.

  15. Premium has been getting smaller and smaller as volatilty has continued contracting. For example last friday at 10am the 5 delta SPX put had around .85-.90 premium. Karsten do you think if I have a long term investment horizon having 100% on SP500 index via (SPY,VOO or VTI) and sell one SPX per $150k. Is that too much risk?

    1. Yes, we’re entering the twilight zone again. Not as crazy low-vol as Jan 2018 yet. This could still all go well for a long time before we have another blowup.
      So, I’m selling puts for somewhere between 0.80 and 1.05 for the 2-day stretch. I’ve already made so much money this year that I don’t have to take huge risks.

      Your example sounds a bit risky for my taste. I do 1 short put with zero equity and keeping the $150,000 in relatively safe assets. If you put the margin cash in SPY, you have an additional 100 Delta right there. If you’re young and adventurous and still have a 50% savings rate, absolutely: do it.
      I would not recommend that in retirement, though! 🙂

      1. I’ve been drifting down on premium too. Any thoughts on how to approach this strategy when it has been a while from last big drop? I’m maybe a year out from FIRE.

        SORR benefit of Put selling also likely caps the upside for stocks, in other words it clips both positive and negative tails off the distribution. I’d be really happy with real returns locked between 7% and 12%.

        Aside: My gut says all the stimulus in the last year is flowing into stocks, and that provides a natural

        1. I’ve scaled down my premium target to maybe only 0.75x when I normally earn when vol is low. I’m still waayyyy ahead for my target income this year. Take a little less risk until the next blowup.

  16. Hey, but the effect of such factors may end, and along with this, economic growth will inevitably end.

  17. What’s the biggest risk doing it for income? I assume if you actually get executed from a drop in the index that doesn’t recover before expiration or you run out of margin?

    It’s interesting, I always wonder about this vs day trading leveraged futures. Would you say this is more a risk strategy for income (comparable to RE, or just earning your divis), as opposed to a trading strategy?

    Also, work wise, does this require you to be monitoring the markets regularly or is it a set and forget strategy?

    1. Biggest risk is that your income goal(s) are not met. Luckily, no one will get executed for trading options 🙂

      It’s a strategy to help mitigate sequence of returns risk vs a buy/hold approach.

      The strategy in reference does not require any market monitoring; it’s market agnostic.

    2. Biggest risk? A drop large enough that wipes out 30% of your capital and then you have trouble getting out of that hole.
      I can’t see how you would have a 2-day drop large enough to cause a drop of that size in the put writing portfolio. Note, the market has to fall first all the way to the strike and then more to attack your capital.

      This has nothing to do with day trading. The strategy needs your commitment to trade on the trading days. Apart from that, there is no monitoring necessary. I can do my daily trades on one single ride in the ski lift on my Android phone.

      1. So much thanks to you and Spintwig for such practical and specific ideas. We face a big sequence of returns risk. We just rolled over my wife’s pension into a money market IRA. The market is at all time highs. Bond yields are very low. We are risk adverse, but can’t live on a 1% income. So, we struggle with what in the world to do. Keep up the work of helping others !

      2. Despite Spintwig’s brilliant backtest, this week I see that a 5D is about 2% below the current SPX price and looking back 2 years 12.75% of the 2-day trading periods have ended in drops more than 2% (largest about 14%). I know this is a very simple and inaccurate calc but it gives me an idea of the risk/profit ratio. This week my XSPs are winning trades but I have to see more by myself.

        Thank you both for this excellent work.

  18. Over the same time period as this backtest, a simple portfolio of 30% SPY ETF and 70% of either IEF ETF (iShares 7-10 year Treasury bonds) or IEI ETF (iShares 3-7 year Treasury bonds) would have produced a similar CAGR and maximum draw down as this options strategy without having to employ leverage and doing frequent trading. So, what is the benefit of this options strategy over the 30/70 portfolio?

    1. Over the same time period as this backtest, a simple portfolio of 50% TSLA and 50% BTC would have produced a CAGR so large one could be retired today without having to employ leverage and doing frequent trading. What is the benefit of this options strategy over the 50/50 portfolio?

      The answer to both questions is the same: no one knew that back then.

      1. That’s such a good point and hilarious too! Intelligence and humour comes as one package I see.

    2. Adding the 70% IEF/IEI to the short-put portfolio instead of money market would have also boosted the reutns. So this is really comparing apples and oranges.
      Also, this option strategy had a much lower vol than anything with equities.

  19. Hi Ern,
    I’m moving up to 2cts, one traded after open, one before close. If index dropped, would you sell 2nd contract at same strike as first one, essentially doubling position or would you try it sell it lower/later or next day even?
    Also, have you noticed/experienced what’s the best time to open morning position?


  20. I may have missed this, but it would be great to get some material / analysis on your preferred stock investments. How you pick them, how preferred stocks perform over time, etc. I know very little about preferreds.

      1. Thanks! I guess id be interested in understanding why you choose preferred shares over common or an equity etf? I fully get the rational for the munis, but it seems like preferred in general underperforms common but is strongly correlated to it. You stated in an earlier post that you don’t want to be over-exposed to the S&P, b/c you have plenty of that in other accounts and levered SPX puts here, but on the face of it it seems your taking all the risk of stocks with a lower return. Is there a security selection factor at work here where your preferred picks do better than, say, VTI, or maybe RSP to mitigate the size factor of a market cap weighted etf? I’ve also wondered if including a non-correlated asset like TAIL in the mix might help in a crash. Thanks again for the info!

        1. During the 2020 meltdown, my bond portfolio had a factor model exposure of 60% stocks and 120% bonds. So, I am most definitely not taking all the stock risk. Quite the opposite, it’s only 60% stocks and 2x that in bonds, which is roughly the “optimal mix” from a Sharpe Ratio perspective.
          Right now, with the March/April 2020 episode rolled out, I now find I have only about 25% equity exposure in my Muni+Prefs portfolio.

        2. “non-correlated asset like TAIL”
          TAIL has some pretty bad long term returns, and even during the 2020 meltdown it was only up 35% which about the same as long term treasuries. It was barely up in 2020 as a whole and you’d think a put buying fund would’ve killed it that year.
          Besides if you’re already selling short-dated SPX puts, it would be really easy to replicate TAIL yourself with intermediate treasuries + buying 10% OTM 1 year puts for much cheaper than paying Cambria $7k every year per $1million invested.

            1. That’s an interesting thought worth looking into.
              I use a little higher leverage ratio than you so I prefer to keep my margin cash very boring, its mostly GNMA bonds plus some junk bonds for diversification. Over the past nearly 40 years of month end returns, this mix has never had more than a 7% draw-down, but the downside is it currently only yields about 2-3%. Should rates rise, its got a relatively low interest rate risk at <4 years average duration and so it should do just fine in that scenario.

                1. Yeah, prefereds do have that nice floating feature and favorable qualified dividends tax treatment but the huge drawdowns 40%+ in ’08 and ’20 terrify me to couple with S&P put writing. I was also looking at portfolios with mostly GNMA bonds plus some convertible bonds have had some decent fixed income returns with low duration (<3yr) and drawdown risk. The beauty of the convertible bonds is in a strong rally like last year is you can get some big capital gains that you can delay paying taxes on until later if you want.

                2. That’s a headache. It’s a liquidity effect if people throw a lot of shares on the market, likely due to margin calls.
                  Another reminder, to budget very generously with your margin cash.
                  For example: Even GS proferreds droppes from 28 to 19.05 (intraday) and 21.10 (if using closing prices) during March 2020. Not so high-quality names even worse.

      1. Disagree with some of them:
        1) in the current environment, you’ll likely pay a bit more than par for quality Preferreds. Most of the Prefs under $25 right now will be from shaky borrowers.
        2) A lot of quality companies indeed issue non-cumulative preferred. I “prefer” (pardon the pun) the non-cumulative shares of a solid company (e.g., GS.PRJ) over a cumulative share from a crappy company.

        But I do agree with 3) do not invest in the index ETFs.

      2. Why avoid convertibles? Usually the mandatory conversion requires the common to trade above a level for 30 days (often 30% upside) so if converted you can just sell for a sweet profit and reinvest elsewhere

        1. The math on convertible provisions is unique to each prospectus / company / issue. It can cut both ways, but usually the conversion provision is structured so that it favors the company and not the shareholder. Company leadership has an information advantage when structuring such provisions.

          Conceptually speaking, if an investor wants exposure to the underlying security including its potential for capital appreciation, it’s typically optimal to invest in it directly and skip the complexity, risk and cost of investing through a proxy instrument such as a convertible.

  21. Shouldn’t the max margin utilization be double what you show? On MWF, at 3:46 PM you are opening new puts while the outstanding puts have not yet expired. So on MWF, the number of outstanding puts is for a time double the number of Tuesday and Thursday. Will your broker allow you to open new puts on MWF if your margin utilization will possibly go above 100%?

    1. Good question.

      The backtest methodology hinges on a 3:46pm ET event cycle. New positions are entered at 3:46pm and expiring positions are exited at 3:46pm (this is noted in the methodology section as “Assignment P/L is calculated by closing the ITM position at 3:46 pm ET the day of expiration/position exit”).

      While backtests attempt to mimic real life, there are some rounding events that need to be made around the edges from time to time. Defining expiration as 3:46pm ET is one such rounding activity.

      Another potential blindspot is that P/L is only recorded as positions are closed (highlighted in the comprehensive methodology at Open position P/L can potentially cause a margin call, similar to the debacle, despite the positions never going ITM and the contracts eventually expiring worthless.

      It is said, anecdotally, to assume that backtests reflect 80% of actual results. Despite quantitive research requiring precision and consistency in execution, its application can be more art than science. Financial market research should almost always be performed with a broad stroke brush lest one fall to the blunders of overfitting.

  22. It looks like SPX offers $5 – $15 less premium than 10 * SPY at corresponding strikes which will more than erase the commission benefit of SPX. In an IRA account, you will probably come out ahead trading SPY rather than SPX; in a taxable account, the 60/40 ltcg treatment of SPX will probably have it come out ahead.

    XSP, which you did not cover, has lower premiums similar or worse than 1/10 SPX, and may be inferior to trading SPY even in a taxable account depending on your tax bracket.

    1. Are you sure about comparing apples and apples?
      1) the SPY is not exactly 1/10 the SPX. It’s more like SPX = 10xSPY+3.
      2) if I look at the option quotes right now, indeed I see a bit of a mismatch, i.e. SPX options a bit cheaper than the SPY options x10. But could there be a closing price mismatch? SPY stops trading at the top of the hour, while SPX options trade until 15min after the NYSE close.

      1. The difference in underlying explains some of the difference, maybe you could compare the next lower strike in SPY to the SPX strike.

        Some other differences which may explain the differences in premium and underlying prices include American (SPY) vs European (SPXY) option exercise and dividend paying underlying (SPY) vs non dividend paying underlying (SPX).

      2. Between 10:14 AM and 10:15 AM on 06/14, the following are prices and put premiums of the 3 for expiration date 06/16. SPY goes ex-dividend on 06/18, so I don’t see why the dividend should affect an expiration of 06/16.

        SPY: Price=423.52, Strike 415 bid/ask=.24/.25, Strike 416 bid/ask=.29/.30, Strike 417 bid/ask=.35/.36

        XSP: Price=423.77, Strike 415 bid/ask=.21/.24, Strike 416 bid/ask=.25/.28, Strike 417 bid/ask=.30/.33

        SPX: Price=4237.35, Strike 4150 bid/ask=2.20/2.30, Strike 4160 bid/ask=2.60/2.75, Strike 4170 bid/ask=3.10/3.30

        While it is true that SPX sells for a 0.05% higher price than 10*SPY, the put premium for 10*SPY for a strike of 416 is 9%-11% higher than the corresponding strike for SPX.

        1. The dividend creates the difference in the underlying. Check next week after the dividend and the difference wont be 4 SPX points anymore.
          If we were comparing apples to apples and premiums were this distorted it would be easy to sell all of the SPY premium and buy the XSP and have a no risk million (or billion) dollar money making machine!

          1. I find today eyeballing SPX and SPY at the same time, that the SPX price is about $3 more than 10*SPY. The SPY quarterly dividend is around $1.50. If you compare the SPY put premium at a given strike with the SPX put premium at the strike $5 higher (ex. SPY 416 strike and SPX 4165 strike), the put premiums are often the same if you can get the SPX put bid/ask midpoint and the SPX put bid/ask midpoint is divisible by $.05. If you can only get less than the SPX put bid/ask midpoint, you will be down $5-$10 over the premium of 10*SPY. SPY’s bid/ask spread is usually $.01 so you will always sell the put at the bid. My guess is that this has nothing to do with the SPY dividend, but we shall see. Even if the premiums are the same, if the price of SPX is $3 more than 10*SPY, and you are selling a SPX put at a strike $5 higher than SPY, you are taking more risk for the same return, so you need to be compensated thru lower commissions, tax advantages, or European exercise.

  23. Hi Karsten, what do you think about having a “portfolio” of options on indexes/ETFs to diversify, for example using SPX, TLT, and EEM?

    TLT would (hopefully) move in the opposite direction when SPX goes down and EEM has fat premiums.
    I have been doing that for a while and it worked well (until recently with EEM 🙁

    1. Yeah, it works until it stops working. I generally like the idea of selling vol in other indexes/ETFs. But I have never done anything beyond the good old SPX. But the strategy does work with other asset classes: bonds, commodities, other equity indexes. If anyone has experiences to share, please feel free to write a guest post here. I know that spintwig ( has backtested more assets and asset classes, i.e., not just the SPX.

      1. Hint hint, wink wink 🙂

        At the end of the day it’s still short vol, whether the underlying is SPX, TLT or a basket of commodities.

        Large shocks can and do bridge the asset class gap. Off the top of my head, Dec 2018 comes to mind. If I’m remembering correctly, the only asset class that didn’t experience a negative return for the year was cash.

        Short answer is “it depends.” There’s nothing that can assure that correlations hold, or that they hold within the timeframe of your contracts, during the next big move.

  24. Hello all together,

    just reading a book “Stocks for the ling run” by j. Siegel which deals with the s&P500 during 9/11.

    By that time the stock exchange has been suddenly closed for a week.

    What does that mean for options trading? How does it work? Are all options calculated with the value of the next opening day or with the last value of the sudden close?

    Best regards,

    I am still at the beginning of options trading. At the moment I have to close my Lynx depot and open one at IB because costs are varying widely. Options on SPX are 3,5$ at Lynx compared to 0,7$ at IB.

    Problem is, that Lynx uses the technology of IB, so there is an 6 month waiting period in between necessary. You can write to Lynx to give your account free – they are very helpful.

    1. If the market is halted then options will be halted for trading. For American options (e.g., options on individual stocks, ETFs) the exercise can still take place while the option is halted.
      For European options, cash-settled (SPX index) I would guess that the settlement is at the next available open.
      Have never experienced it, though.

      I’m using IB and so far it’s a good experience. Not sure how easy it is to switch and transfer positions. Should be easy and a matter of a few days.

  25. ERN,
    First off I have to get the obligatory thank you out of the way for putting out such great content and constantly challenging my finance and investing views. I was curious as to your thoughts on margin allocation given current rates, tapering, and possibility of rising rates in the not-so-distant future and the potential (relative) increase in bond volatility.

    Would it make sense to allocate a portion of Muni CEFs to very low beta dividend stocks and accept the less favorable tax treatment? Do you view your preferreds as a surrogate to this approach? Or do you altogether think Muni’s are going to be less sensitive to a rising rate environment? Just trying to think of ways to be appropriately uncorrelated with an SPX put selling strategy in the current and coming environment while not trying to fall into a market timing trap. Appreciate your thoughts!

    1. My Muni CEFs are legacy funds that have large built-in capital gains. I will revisit the possibility of selling in a future year when I reside in a lower tax bracket. Don’t like to pay 15% Federal taxes on the LT gains.

      Currently, I have a lot of Preferred Shares with slightly higher yield. Even the after-tax yield Yx(1-0.15) is higher than for the Muni CEFs. Might shift more into that. But there is some concentration risk. Mostly financial companies (WFC, GS, MS, BAC, STT, etc.). Don’t want to go overboard there!

  26. Hmm, seems to be that with the smaller “option options” you’re probably better off being less otm to overcome the extra commission cost % per trade (depending on risk tolerances of course)

    Would $UPRO be considered an even smaller version of spy for these use cases? It’s trading at ~40 so margin cost would be ~4000. It’s a 3x leveraged version of spy. Anything important to consider when selling puts on this?

    I’d imagine it’d do worse as is the case with going smaller and smaller but would it be a good starting ground for small accounts?

    1. For small accounts, yes, sure, go a bit less OTM. It’s more risk, %-wise, but not that much risk $-wise.
      I’ve never done even SPY options, and UPRO is even more exotic. Due to the 3x leverage, you face some serious downside risk.

      For folks with less money to invest I’d recommend:
      1) don’t do options, just do equity index funds until you get at least well into the 6-figures.
      2) maybe just do vertical spreads instead of naked short puts.

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