Passive income through option writing: Part 9 – 2016-2021 backtest: Guest Post by “Spintwig”

November 10, 2021 – Welcome to a new post in the Put Option Writing Series. My blogging buddy Spintwig volunteered to perform another backtest simulation. If you remember from Part 5, he simulated selling 5-delta and 10-delta put options going back to 2018. He now added 18 more months of returns to go back to September 2016. In the end, I will also compare my live results with the simulated returns and point out why my live trading achieved even slightly better results.

Mr. Spintwig, please take over…

* * *

Thank you BigERN (can I call you Dr. K?) for another opportunity to collaborate and add to the body of research that supports what is colloquially known as the “BigERN strategy.”

Part 8 of the options trading series is a 2021 update that discusses, among other things, premium capture, annualized return and the idea of lowering leverage while increasing delta.

Let’s throw some data at the idea of trading a higher delta at a lower leverage target and see how metrics like premium capture, CAGR, and max drawdown are impacted. As an added bonus, I’ve obtained SPX data that can facilitate a Sept 2016 start date for this strategy. This gives us an additional 18 months of history vs the SPY data that was used in Part 5.

For the benchmark, we’ll use total return (i.e. dividends reinvested) buy/hold SPY (S&P 500) and IEF (10Y US Treasuries), rebalanced annually, in the following configurations:

  • 100 SPY / 0 IEF
  • 80 SPY / 20 IEF
  • 60 SPY / 40 IEF

Let’s dive in…

Strategy Details

Symbol: SPX

Strategy: Short Put

Days Till Expiration: 2 DTE (Mon, Wed); 3 DTE (Fri)

Start Date: 2016-09-01. End Date: 2021-10-29

Positions opened per trade: 1

Entry Days: Mon, Wed, Fri, at 3:46 pm Eastern Time (i.e., 14 minutes before market close)

Strike Selection:

  • 5 delta +/- 4.5, closest to 5
  • 10 delta +/- 5, closest to 10

Trade Entry:

  • 5D short put
  • 10D short put

Trade Exit: Hold till expiration

Max Margin Utilization Target: 20%-100% (1x to 5x leverage) in 20% increments

Max Drawdown Target: 99% | account value shall not go negative


  • Margin requirements are always satisfied
  • Margin calls never occur
  • Margin requirement for short put positions is 20% of notional
  • Early assignment never occurs [ERN: it won’t, as these are European Options]
  • Prices are in USD
  • Prices are nominal (not adjusted for inflation)
  • All statistics are pre-tax, where applicable
  • Margin collateral is invested in 3mo US treasuries and earns interest daily
  • Assignment P/L is calculated by closing the ITM position at 3:46pm ET the day of expiration / position exit
  • Commission to open, close early, or expire ITM is 1.32 USD per contract
  • Commission to expire worthless is 0.00 USD per contract
  • Slippage is calculated according to the slippage table
  • Starting capital for short option backtests is adjusted in $1000 increments such that max margin utilization is between 80-100%, closest to 100%, of max margin utilization target
  • Starting capital for long option backtests is adjusted in $1000 increments such that max drawdown is between 80-100%, closest to 100%, of max drawdown target
  • For comprehensive details, visit the methodology page

Let’s look at the results

Starting Capital

Starting capital between leverage targets is non-linear (eg: 2x leverage isn’t exactly half as much as 1x) due to the varying amounts of interest earned on margin collateral and other strategy mechanics.

Increasing the delta target from 5 to 10 enables the strategy to execute within the backtest parameters with a smaller amount of starting capital.

Margin Utilization

Average margin utilization is roughly the same between both delta targets.

Hindsight bias was used to maximize Reg-T margin utilization for each strategy. This allows a “best case” scenario for the option strategy to outperform the benchmark. Also displayed is the date on which each strategy experienced maximum margin utilization.

Premium Capture

Premium capture for 10-delta strategies is materially lower than for 5-delta strategies. Nevertheless, a 37% profit margin on premium sold isn’t a bad deal.

Win Rate

The 10-delta strategy experienced a lower win rate vs the 5-delta strategy. [ERN: Not a huge surprise here because the strikes are higher and thus the 10-Delta options are more likely to end up in the money.]

Monthly Returns

Despite the smaller amount of premium capture per above, the 10-delta strategy outperforms the 5-delta strategy with regard to average monthly P/L.

Also displayed is the best and worst monthly return for each strategy:

Maximum Drawdown

The max drawdown for the 10-delta strategies is higher than the 5-delta strategies.

Maximum Drawdown Duration

10-delta strategies experienced greater max drawdown durations than 5-delta strategies.

Compound Annual Growth Rate

The 10-delta strategies outperformed the 5-delta strategies with regard to CAGR.

Annual Volatility

10-delta strategies experienced greater volatility than 5-delta strategies.

Sharpe Ratio

5-delta strategies outperformed 10-delta strategies with regard to risk-adjusted return. The greater the leverage the lower the risk-adjusted returns.

Percent of Profit Spent on Commissions

The 10-delta strategies generated and retained more premium than the 5-delta strategies. Thus, commissions are a smaller proportion of the total return. [ERN: for clarification, the numbers displayed are the percent of the gross option profits lost to commissions, not the percentage of the account value!]

Total P/L

10-delta strategies outperformed 5-delta strategies with regard to total return. [ERN: again, as expected, but note that the higher return also comes at the cost of much higher volatility!]

Overall Performance


Regarding premium capture, there is a material reduction when going from 5-Delta to 10-Delta. Nevertheless, the total return increases. A smaller amount of premium is retained from a much larger “pie.”

When we look at risk-adjusted return, the lower delta strategy has a materially higher Sharpe Ratio. Reviewing the max drawdown and max drawdown duration between the two option strategies supports this observation.

However, the best and worst monthly returns are about the same. For example, the worst monthly return of a 3x leveraged 5-delta strat vs a 2x leveraged 10-delta strategy is similar.

The worst monthly return is the best proxy available for measuring the impact of left-tail events. Understandably, it leaves much to be desired and doesn’t truly capture the impacts of rapid shocks like flash crashes or circuit-breaker-tripping moves.

Dialing up the delta while reducing the leverage has yielded a bumpier ride. Structurally, it guarantees a less severe left-tail event since there is less leverage in play.

Back over to you Dr. K —

ERN/Karsten’s thoughts

When I worked at BNY Mellon, some people called me Dr. J, like the basketball player. But Dr. K works just as well! But in any case, thanks, Mr. Spintwig for volunteering to run this new extended case study and simulation. Nice to see that the February 2018 blowup didn’t pose any problems to your simulations. Quite the opposite, by including the late 2016 and all of 2017 we even increased the overall Sharpe Ratio. For example, the 5-Delta, 3x leverage strategy Sharpe Ratio was 1.71 in the 2018-2020 simulation, but 2.12 in the 2016-2021 simulation.

How do the simulations compare with my live returns? Well, here’s something we don’t see too often: my live returns look substantially better than the simulated returns. I achieved a Sharpe Ratio of just about 4.0, which is significantly higher than in the simulations. It’s not because I had much higher returns, but much lower risk. My average strategy return (11.9%) lines up roughly with the Spintwig 5-Delta, 4x leverage return (11.1%), or the 10-Delta 3x leverage (10.8%).

Return stats: Live returns vs Spintwig. (Note: I added a 3M Treasury return to my put writing profits to make the returns comparable to the Spintwig simulations)

Then, what caused the lower risk and higher Sharpe Ratio? There are (at least) three reasons:

1: Market Timing, a.k.a. dumb luck!

If we look not just at the overall returns but also the returns during the subperiods, notice that during the relatively calm period up to January 2018, I vastly outperformed the simulated strategies with 5-Delta puts and even the 10-Delta put with 3x leverage. Afterward, my average returns were much more modest. And that’s easy to explain. The early period still covers my accumulation phase and I took much larger risks. Then in February 2018, I announced my plans to retire and we also received the proceeds of our San Francisco condo sale and a large portion of that went straight into the IB account. I took the put writing risk down a notch in light of the much larger account size and the realization that I’d have to live off the IB account proceeds. That was brilliant market timing. Or, well, mostly dumb luck, because I ran the strategy full-throttle during the very profitable time in 2016 and 2017, but then treaded a lot more cautiously right when volatility hit.

Cumulative returns normalized to 8/31/2016=100.

During the last year and even 3 years, I mostly underperformed the aggressive fixed-delta, fixed leverage strategies that Spintwig simulated here today. And I’m totally happy with that because even at that modest risk target, I generate enough retirement income to fund our lifestyle.

2: Targeting a fixed gross put writing revenue as opposed to a fixed Delta lowers the monthly return volatility

Take a look at the chart where I plot my monthly returns against the monthly returns of the 5-Delta, 4x leverage returns:

Notice the differences?

  1. As we already know, I outperformed the Spintwig strategy in 2016/17 because I ran it with a higher risk tolerace.
  2. During normal times, i.e., months when you simply make your full gross option premium, my returns are extremely range-bound, with very little volatility. Look at the almost straight line after the pandemic. And that’s by construction becuase I target a fixed income per month. In contrast, Spintwig’s simulation had significantly more volatility since then, even some losses. Actually, post-pandemic I was running my strategy with a very low Delta, all the way down to 2. Though, my Delta has since moved up again to about 4 because I also sell fewer contracts, as I outlined in Part 8 of the series. With less leverage you have to increase the Delta to keep the income the same!
  3. Right after the February 2018 volatility spike, the fixed-Delta strategy got hammered again in March. The worst monthly return in the simulation! In contrast, my losses were limited because I targeted my income stream, which called for a lower Delta and less leverage. I still lost another 1% in March 2018, but the loss wasn’t as painful as in the simulation with a 4x leverage and a fixed 5-Delta.
Rolling average Delta over 100 contracts. For the purists: a Delta of 4 displayed here means a numerical value -0.04 in the option Greeks formula!

3: Dumb luck (again!) in Q1 of 2020!

The one time when I deviated from the “fixed gross put-writing revenue” target was the pandemic bear market. After suffering two smaller losses in January 2020, a very stinging loss on February 24, and a close call later that week I saw a significant volatility spike. Sure, I could have continued to write options with a $1.00 premium Monday to Wednesday. But the implied volatility was so high and the option premiums so rich, I sold options with a 1-Delta or 2-Delta that still yielded more income than I budgeted. And I also did a few additional intra-day trades and supplemental trades on Tuesdays and Thursdays when the current options had already lost most of their value. See Part 4 of the series.

So, in summary, the improvement in the Sharpe Ratio came mostly through the lower volatility and a little bit of luck about timing my target risk. I don’t want to make a big fuss out of that. No need to spike the football. I would have been happy with the Spintwig simulation results as well.

Monthly vs. Daily returns

With a Sharpe Ratio of 4, i.e., roughly 2.5% annualized risk, and 10% annualized excess returns, one might be tempted to lever up this strategy. Why not target 10% risk and 40% annual (excess) returns? Retire after maybe 2-3 years of accumulation and then run this strategy with a 30% safe withdrawal rate?! All of our worries are solved, right?

Well, not so fast! Hidden in the low monthly standard deviation is the fact that there is significant intra-month volatility. Plotting the monthly and daily cumulative returns, we can see that during some of the stress periods (Q1 2018, Q4 2018, and Q1 2020) you had some unpalatable intra-month vol that is not visible in the monthly return numbers. If you had levered up the strategy much more you might have faced margin calls, forced liquidations, and you might have locked in catastrophic losses. In contrast, in my live strategy with relatively modest leverage, I recovered most losses rather swiftly.

Daily vs. monthly returns. These are excess returns of the put option writing only, not factoring in the potential margin cash returns from 3M T-Bills (or preferred shares and Muni bond funds as in the ERN portfolio)

So, again, a warning to all current and prospective option strategy fans: Don’t fall for rosy monthly Sharpe Ratios and don’t use too much leverage. I have written about two examples where option writing went very wrong because people were sloppy with their risk management:

To hedge against a potential “Black Swan” event, you want to have a sizable safety cushion.

So, I’m totally fine with a 10% annualized return. And I should also stress that I don’t compare my 10% put writing return to the 17% equity return over the last 5 years. I need to compare my strategy returns to a 1.5% to 2% bond yield. As I outlined in Part 8 of the series (see section 2 “How does the Put Selling Strategy fit into our overall portfolio?”), I have plenty of equity and real estate exposure in the other accounts already. Instead of keeping 25-30% of safe assets like bonds, money markets, TIPS, I Bonds, etc. with lousy return prospects, I prefer to take a little bit of extra risk. Writing puts suddenly looks very attractive again! Also, keep in mind that the 10% return is in addition to the interest and dividends from the fixed income portfolio.

So, in any case, I just wanted to point out the slight discrepancy between the simulations and the live returns. I don’t want to make too much out of the difference. Mostly because it’s due to lower realized risk in my live returns, but that’s not something I want to bank on because there’s still a lot of hidden black swan risk that – so far at least – has never materialized. But that risk is always on my mind!

Thanks for stopping by today. Please make sure you check out the other parts of this series:

Title picture: (or maybe it’s Big ERN’s secret trading floor???)

123 thoughts on “Passive income through option writing: Part 9 – 2016-2021 backtest: Guest Post by “Spintwig”

  1. Sharpe should never be considered when shorting premiums. It is a meaningless number that disguises the incredibly high tail-risk.

    You really need to calculate something along the line of Generalized Sharpe Ratio, e.g.

    GSR = SR * (1 + (skewness/6)*SR – ((kurtosis – 3)/24)*SR^2)

    Where GSR = generalized Sharpe Ratio, SR = standard deviation. This can be found in “Positional Option Trading” by Euan Sinclair, pg. 144.

    This will show a number that is closer to the true value of this leveraged short premium strategy.

    You should also read the short write up of “Negatively Skewed Trading Strategies” by Glyn A. Holton (2003).

    It goes into discussion of negatively skewed strategies like bonds spread convergence, deep OTM options etc…

    The important take away is this:

    “Watch the trader who makes consistent money. He is the one who is going to
    blow up”

    Most retailers don’t understand the full risks of options and it is quite disappointing that many like you and Tastytrades are pushing extremely risky options strategies to unsuspecting people, many who are ready for retirement (when they should take the least risk!!!).

    Like I said before, I have done many backtests and simulations on this strategy. This is a Wallstreetbets level of bad strategy that disguises incredibly high tail-risk. Spintwig’s backtest hides the significant drawdown *intraday* with this leveraged strategy.

    For example, on 2020-02-28 10:05AM, your strategy at 5 delta, 3x leverage (with puts sold at EOD on 2020-02-26) suffered almost 12% drawdown. The only reason it survived was because of the huge +3.5% SPX move literally in the last 15 minutes that day. You think regular people could have held on until the very end while watching their retirement burn? I really don’t think so. That’s a 12% drawdown in just one trade, in one day!

    This leveraged short premium *will* blowup, it may be 1 year from now, it may be 5 years from now, but you and many of your readers will suffer significant losses beyond recovery (for retirement), and all of this while not even beating buy and hold! And you gain even more with the 15% capital gains tax from buy and hold, compared with the 20%+ from the 1256 contracts like SPX.

    There is no free lunch with options!

    1. Using Markov Chain Monte Carlo simulations with conditional probabilities of the market of the last 20 years, one can easily lose 40%+ of their portfolio in a matter of couple of days with this leveraged strategy.

      If you want to blow up your retirement portfolio, all power to you.

      But *please please please* disclose the significant tail risk of this strategy compared to buy and hold.

      Your readers deserve that much.

      1. Sorry to say this, but that fact you make these sweeping statements like above without ever having run any of the strategies or even the simulations you refer to with the “Markov Chain” name dropping, means that you are just not very credible. Just like most of your other statements here, the 40% loss in a couple of days is completely made up.
        If you actually KNEW statistics and finance, you’d know that a 1x notion strategy is actually significantly less risky than even a buy and hold

    2. Yea I’d like to see the backtest results during a real bear market like 2000-2002 and 2007-2009. Lots of leverage and a sustained big marketwide decline could get very ugly. I feel like the current market is long overdue for a crash right now but I don’t know how anyone can properly time such a thing.

      “Watch the trader who makes consistent money. He is the one who is going to
      blow up” I like that quote, rings true.

      1. I’ve done some informal backtests and the strategy worked well in 2008. Again, because volatility built up over time and you sell options further and further OTM.

        But if anyone has a proper backtest, please let me know because I’d publish that as a guest post!

    3. “You think regular people could have held on until the very end while watching their retirement burn? I really don’t think so. That’s a 12% draw-down in just one trade, in one day!”
      The S&P 500 index also had a 12% draw-down in one day on 3/16, so if you’re going to use this argument against put selling, you have to also be fair and use it against index funds as well. While the put selling strategy was down 12% in one day, that was the max draw-down during the entire covid stock market collapse, meanwhile the buy and hold S&P 500 investor ended up with a max draw-down of 35%. Of course you could reduce the risk of both portfolios buy holding negatively correlated assets like treasury bonds.
      I do agree that sharpe ratio isn’t the best measure for evaluating option selling portfolios and I don’t think it should be a huge part of most peoples retirement portfolio, but I think it can be a supplement to buy and hold index funds.

      1. Good point. Also keep in mind that there is no way for anyone to confirm what the exact intra-day drawdown would have been, because John has no idea what the strike was. My suspicion was that John just naively took the intra-day SPX move and multiplied by 3x. But only the drop below the strike is 3x!

        1. I’ll give him the benefit of the doubt and guess that he estimated what strike you could sell based on where the VIX was ~27 on 2/26, so you could’ve probably sold 4-5% OTM put when S&P was at 3115 it would’ve been the 2975 strike so when the index dropped to 2855 at the intra day low on 2/28, it would’ve been a $12k loss which comes out to be 12% loss on a $100k portfolio intraday with 3x leverage but as he mentioned S&P came all the way back to 2955 so the loss would’ve only been ~2%. But even still 12% loss isn’t too bad if that was your only loss on the way down, even buy and hold 1x index investors 1x would’ve been down 12% from the previous highs at that point

          1. I give people the benefit of the doubt. Once, twice and even three times. But he’s made so many false outlandish claims that it’s getting irritating. This is the problem with trolls, they can make up some lie in 30 seconds but it takes me 30 minutes to look up the source and debunk it.

            I might write up an update or a separate blog post to address that 2/28/2020 issue. But the net-net so far: It’s a non-issue because option prices had already spiked on 2/27, so I had a 1.71% loss attributable to the puts on that day.
            Had the market closed at 2855.84 on 2/28 some options would have indeed ended up in the money (I had strikes between 2800 and 2925). But the additional loss on that Friday would have been only 0.15% because the option values had already blown up the day before.
            But luckily, the market recovered and all options expired worthless. So, I made back not just the loss from the day before but also the full premium for a 2.09% gain that day attributable to the options. But even absent of the recovery I would have never come even close to losing 12%.

            That 12% figure is a complete fabrication. I would have to assume that he calculated 2855.84 is a -4% move intra-day relative to the 2/27 close and he simply multiplied that by the strategy leverage. Which would only show how asinine that calculation is because nobody would sell 50-Delta ATM options with 3x leverage.

    4. I have a skewness closer to zero than the S&P500. The excess kurtosis also washes out in monthly returns. What’s your point?

      I’d like to see where you got the numbers for 2020-02-28 10:05 am simulation. With the data spitwig provided you have no idea what strike he as using. You can’t just take 3x the daily return. You have to factor in the strike as well.

      And again: since you didn’t read the post to the end: as I’ve said here and before: I don’t view the Put writing strategy as competition to the S&P, but I view my 30% in the IB account + 70% equities a good alternative to 70% equities + 30% Treasury bonds.

    5. John – I held on to the end. Why – Here is a very simple answer “statistics” told me to do it. Thus, I always prefer to hold to the end and take losses. I have seen it over and over again that it works. At that particular time I was may be $18k down or $36k down. I don’t remember exactly right amount but it was big – until it wasn’t. Then I re-loaded and made more money.

      Oh yes – I am very regular guy.

      Please note that I do recognize your good intentions.

    6. Having made most of my wealth in the crypto markets reading things like…
      “That’s a 12% drawdown in just one trade, in one day!”
      Literally made me laugh out loud. Maybe you’re just old or that younger generations now perceive risk differently… But +-20 in a day on a 7 digit account is no sweat for me and some of my friends…

  2. holy **** this is becoming a mathematician blog, not a FIRE blog anymore! You gotta have a phD to understand anything here.

  3. Thanks again for the opportunity Dr K! Each time we collaborate I learn something new and am able to improve my own work because of it.

    Interesting to see how the vol was favorably by targeting a specific premium vs a specific delta. I may pull on this thread a bit more with some additional studies.

      1. I like to “risk off as fast as possible.”

        With 0 DTE there’s: no overnight risk, I’m out of the market Tues/Thurs, and because gamma is highest during this time the ebbs and flows of the market can quickly throw the position into a profit target far faster than theta alone. And on the days when the market moves against you, theta decay is racing to shed all option value in just a few short hours.

        It’s not uncommon for me to hit 60-70% max profit in less than 15 minutes then exit the trade.

        1. I sometimes do the 0DTE as supplemental trades. Problem is: I have only 3 intra-day trades, so really only about 30% of the insurable downside risk I can make money on (5 intraday and 5 overnights). So, it doesn’t make enough money for my taste.

  4. I would recommend that John writes a blog post or points us to his blog. The problem that I have with John is that there is no “meat” behind those statements.

    John – if you can – write a massive blog post or establish your own blog and go at it. Unfortunately, at this time, you don’t provide a real solution beside scare people to submission of not doing options. But wait a minute – options have been around for many decades, thus is the (liquidly) system broken ? No.

    Can someone please correct me but “isn’t a goal a goal of doing options is to always make money”? What is a true alternative “die by a thousand cuts”?

    Will 3DTE, 2DTE – option fail at times? Of course. Will always fail define NO.

    If someone leverages up some huge amount – of course they will fail no matter the strategy.

    Lastly, I particularly enjoy higher volatility – And everyone reading this blog knows the answer why.

      1. There ya go – John. We got a plan. In all seriousnesses. Could you please consider it. We will flush out all of the unknowns. You might be right but I don’t know where.

        I always felt that putting on complex options positions are benefit one party and as we all that party is — a Broker-Dealer for collecting commissions.

  5. Interesting that the 5-Delta 3x leverage version has some similar characteristics to the 10-Delta 2x leverage version in this backtest. Certainly some of the parameters are different but the CAGR, monthly P/L, and max drawdown are similar. We’ve discussed how to go from one to two puts in the past, and this would seem to suggest selling one contract, gradually increasing delta until you have enough net liq to move up to two contracts.

  6. Regarding the question of “tail risk” with this strategy, Wikipedia has a list of biggest percentage up and down moves on the S&P500:

    It looks like based on history if your strike was 5% below the market when opened and you used 3x leverage you could lose 45% in a single day. If your strike was 2% below market you could lose 54% in a single day. Also note all the huge one day gains for the S&P500 there have been over time, the put selling strategy misses every one of those big gains.

      1. Well just buy & hold on the index with no leverage is a lot safer and probably has better long term returns, so why complicate things? Note that even in this very blog post, if you look at the table that compares the strategies to buy and hold on the index, you will see that buy and hold BEAT the strategy! Am I missing something?

        1. You’re missing part 8 of this series where it’s specifically said that this isn’t supposed to be part of the equities allocation.

          There’s even a call out to all the VTSAX holders that say “buy, but, my VTSAX had more total return.”

          1. I like diversification but this strategy is not really true diversity since it’s heavily correlated to the index you are also investing in. So higher risk, lower return and not real diversification seems questionable.

        2. This back test also only used 3 mo t-bills to hold against the short puts that pay near 0% interest, you could’ve gotten better returns and possibly lowered risk by substituting them for longer dated bonds which you’d earn an additional ~2% and they’d counteract the drawdowns since they were usually inversely correlated to equities/put selling. You could’ve also added something like ERN did with a little more risk/return like Munis, corporate bonds, CEF’s, and preferred stocks and boosted returns by additional 3-6% which would’ve beaten the 100% stocks likely with less risk.

          1. Will any broker allow you to use the proceeds of put sales to invest in anything else without incurring margin borrowing fees/interest?

            1. I have reg T margin accounts with tastyworks and etrade. Both seem to require naked put collateral to be kept in cash that earns nothing. I think you need a portfolio margin account to be able to use stocks or bonds as collateral.

                1. I have TD Ameritrade and they don’t allow you to do this. I’m considering getting level 4 options and portfolio margin (which is all over kill for what I want to do) but the ability to sell naked puts would allow me to keep my cash in collateral, some form of bonds. Kinda weird bc I guess technically they would be naked puts but they’d be totally covered by the cash I could make by selling the bonds, which are negatively correlated in a drop in the stock market.

            2. Interactive brokers lets you invest what you would hold against the puts. You don’t have to hold any cash, but its probably a good idea to be at their portfolio margin level >$100k if you want to do this.

    1. Hi ERN and spintwig. I’ve been following your series here for a while now as I learn short options trading strategies. I love what your doing, please keep it up. It’s not exactly replicable in Canada due to exorbitant commission fees, taxes and trading platform inefficiencies, but nevertheless it gives me some great ideas for portfolio management. It’s also nice to see someone’s fresh take on short options which is different than the tastytrade method.

      If I may make a request I would like to hear about your thoughts on risk management in areas that you’ve only quickly touched on. Maybe something for a future blog post :).

      More specifically:

      1) Why you don’t diversify your options trades ie why not mix SPX with trades in GLD/TLT or something equivalent?

      2) Some more in depth thoughts/discussion on purchasing far otm puts to hedge your portfolio (I believe you touched on it in at least one of your blog posts, but you’ve left me wanting more!)

      3) Or hedge to the upside ie buying far OTM calls to avoid FOMO

      If you’ve already hit these topics please let me know where I can go and digest some of your thoughts.



      1. 1) when there’s a shock, correlations tend to converge to 1. If there’s a short vol surprise large enough in SPX to generate concern for the portfolio, then the position size is likely too large and other assets classes are likely feeling the effects of this shock too.

        2) the purchase of very far OTM puts was an exploration in using vega as a monetization instrument as opposed to delta. The data leads me to believe there is potential opportunity here. However, it assumes correlations hold. Generally a simpler approach of a smaller position size is the optimal hedge for the strategies and use cases for retail options trading / SORR mitigation.

        3) Fomo is a behavioral risk, not a portfolio risk. The solution for that is greater discipline / an investment policy statement / your own trading mandate / outsourcing your trading / not looking at the market / etc.

        1. Spintwig, have you looked into doing put spreads instead of puts on the same schedule as this study (2DTE or 3DTE over the weekends)? As put spreads limit the potential max loss, you can probably go higher on delta. Surely, it increases the chances of going ITM, but would like to see how the results compare to selling naked puts in <5 delta.

        2. Thanks for the valuable analysis, especially on the part of behavioral risk being a risk to manage. As they say, “you’re your own worst enemy sometimes.”

          I’ve also read your studies on far otm put hedging which is actually what peaked my interest on the topic. Unfortunately, other than what you have produced and one or two other articles I’ve found online there’s fairly limited literature on the topic.

          Lastly, I agree that most assets trend towards a correlation of 1, but there are some exceptions. TLT and GLD seemed to hold fairly well at being uncorelated during the recent pandemic. Of course, on the other hand assets like GDX, corporate bonds and muni funds trended towards 1 with SPX. At least that’s what I understand.

          Maybe some diversification would smooth returns? Do the costs outweigh the benefits?

          Maybe the IV in some of the most uncorellated assets don’t produce the amount of premium required to make the ERN strategy work?

          Thanks again for the work you and ERN do. This is not the simplest of stuff to understand and you really make it much more palatable for people like me!

          1. Happy to hear it’s helpful!

            I may pull on that thread a bit more and explore the concept in future studies.

            This is a bit of a spoiler, but I’m working on some GLD studies that I intend to publish in 22Q1. I’ll add some overlays and discussion to see if GLD put options zig while SPX put options zag.

            And since you mentioned TLT, I’m currently doing exploratory research on bond ETF options. Prior work specifically on TLT is at: but I’m thinking there are ways to improve these results.

            Stay tuned…

        3. 1: true for all equity indexes. But the diversification into selling vol for some other asset classes: gold, oil, bonds, etc. certainly sounds like a potential extension. It might smart folks like to simulate that, though! 🙂

      2. 1: I have thought about that but never implemented this. But I know people who sell vol for all sorts of different asset classes. Seems to work. Spintwig also has simulations for different underlying assets.

        2: Thought about it. Never pulled the trigger because for the little bit f extra protection, I’d leave too much premium on the table.

        3: I have a 7-figure net worth tied up in equity index funds. I don’t feel FOMO when the market rallies. 🙂

  7. Big Ern, Is it a good time to rebalance my portfolio? I’ve set it on 60/40 but stocks being so high lately skew it, HOWEVER, I’ve been reading that Interest Rates will go higher and it’s not a good time to buy BND? What do I do? Bonds and stocks aren’t inverse corelated any longer?

    1. Bonds will have low expected reutrns for a while. But they are still needed to diversify.

      But also keep in mind that with rising interest rates you lose a bit from the duration effect, but then also make higher interest income in the future. If the rise in interest rates is orderly (not like the late-1970s!!!) then bonds will still do OK.

  8. The profit margin on the naked put strategy is slim to begin with. Buying a lower delta protective put will severely reduce your profits or even convert your profits into losses while not greatly reducing your max draw down. I have found through back testing SPY (03/2018-05/2021) over this period that going much above 10 delta increases your max draw down at a much higher percentage rate than profit (other periods may be different); profit doesn’t really go up that much as delta increases over this period because premium capture decreases. Of course, if you had some psychic ability and knew that a 1987 type crash would occur next week, it would pay to do the spread.

    To give you some idea of the prohibitive cost of the protective put during this period, a 3 delta protective put would only have made money 2 times for a total gain of around $400 while losing around $3600 overall. During this same time period, a 10 delta naked put would have made a profit of around $4200. So most of your profit on a 10-3 spread would have been eaten up by the cost of the 3 delta protective put. I found that a 20-10 spread would have actually lost you around $500 over this period.

    1. How does it look with a 5 – 1 delta spread? More specifically a 100 width put credit spread. This is what I do since I don’t have $1.5m like ERN to write naked.

      1. Back testing SPY (03/2018-05/2021), buying a 1 delta protective put would have made money 0 times while losing around $2100 ignoring commissions. The median put otm pct was 5.03% ranging from 1.33% to 26.9%. Selling a naked 5 delta put would have made about $3600 ignoring commissions. The median put otm pct was 2.6% ranging from 0.71% to 18.55%. The 5-1 spread made about $1500 ignoring commissions. The median dollar difference between the 5-1 strikes was $700 (7 SPY points) ranging from $200 to $2900. The median percentage that the 1 delta strike was below the 5 delta strike was 2.41% ranging from 0.63% to 10.26%. Bear in mind that the median dollar difference between strikes is relatively meaningless because it greatly depends on the price of SPY which has varied around 100% during the time period.

        1. One way to mitigate this is to buy a long dated (3m+) 1 delta protective put but keep rolling the short dated 5 delta puts. You might’ve even made enough money in Mar ’20 on the long dated protective put to pay for all the other ones that expired worthless

          1. Currently a 93 day 1 delta put on SPY is at a strike of 270 and costs $0.40. Not much protection and a 5-1 spread will tie up more collateral than a naked 5 delta put by itself.

            1. Yeah, I don’t think the goal is for full protection but a cost effective way to do the same strategy with less capital and meet a brokers margin requirements.
              I’m guessing a 40% OTM 93 day put bought in Dec ’19 still exploded in value in Mar ’20 even if it never went ITM

        2. You guys must have really large accounts or maybe portfolio margin? I would like to do a 5D or fixed $100 premium SPX put naked but TOS wants $83k in buying power to write that. I could only do one contract netting $100 in premium. If I do the 5D spread with a 100 point width I get $80 in premium but I can write 8 of those now netting $640 in premium since TOS wants $10k in buying power per contract.

  9. Why not just run this strategy during accumulation phase on top of brokerage account filled with most/all equities, especially for the lower leverage target? Seems akin to running risk-parity given the regression factors of the put selling strategy you mention….

    The only counterpoint I can think of is that this is suboptimal vs. just levering (5-20%) more equities to begin with, but maybe this would be appropriate upon approaching the withdrawal phase?

    1. I did run my strategy during the accumulation. With a lower % of my total portfolio but with a high leverage (up to 5x).

      I don’t think that vol mitigation is that crucial during accumulation. Most folks will be OK with equities.

      But if you run this strategy with SP500 index funds and then maybe 1x leverage put options on top of that, it would certainly work in the accumulation! 🙂

  10. Your blog is a treasure trove of information — thank you so much for sharing it with us! 🙂

    I’m in my mid-30s non-American, with hopefully 10-15 years to retirement (but I’m flexible!). I’m still learning and not going to implement any of these advanced strategies until I can fully understand them (and use a paper account first!)

    A couple of questions:

    1. I’m currently using a 100% equities portfolio: 70% VTI and 30% VXUS.
    Do these option strategies require me to hold SPY ETFs instead of VTI?

    2. Is your option strategy recommended to someone in the accumulation phase like me? That is, can I use this on top of my 100% equity index fund exposure to smooth out the ride to retirement?

    (I believe options, futures contracts are taxed at capital gains tax here which is 25%, unless the tax authority declares you as an “active trader” and then you get hit with the marginal tax rate which is much higher in my case!)

    3. Any suggestions on which instruments to use for the margin collateral for non Americans? In my case the interest on US bonds will be taxed like dividends (25% capital gains tax).


    1. 1: No, you can hold anything you want as collateral.

      2: Since you already have 100% equity exposure, you want to use the leverage only very sparingly. Maybe only another 3-5 Delta short put, with 1x leverage (i.e., with your collateral covering the entire 100xstrike)

      3: As I said before, you can keep holding what you have. But due to the correlation, you certainly don’t want to use 2x and certainly not 3x leverage ON TOP of you equity portfolio. 🙂

      1. I kind of wonder about then, selling options on TLT, which is negatively correlated to SPY, if you are 100 percent in SPY

        1. You could do that. And a lot of folks choose this route.
          It’s likely even cheaper and easier to use the options on the Treausry futures.

          The only issue: which side (call or put or both) will you sell. That determines the correlation.

    1. Yes! Nice when the index goes down and you don’t lose anything on your way-OTM puts.
      (even though for full disclosure, I did write a few extra puts late on Wednesday and they ended up slightly in the money. No biggy though, because 80% of my contracts made money)

  11. Mr. Spintwig,

    When IV is high there can be multiple -0.05XXX deltas. Which one was your back test picking? The highest or lowest or maybe even mid 5D strike?

    1. Backtest parameters targets 5 delta, +/- 4.5 delta, closest to 5 delta.

      In other words, if there are -0.053 and -0.046 deltas, I select the -0.053 position since it has the lowest absolute distance (i.e. closest) from -0.500

  12. I got a question about leverage – how do I know I’m not over-leveraging? When I look at Spitwig’s starting capital calculation over at his SPX put writing studies, I see that it only begins with 200k+ portfolios, and they are all calculated such that margin calls are just shy of happening.

    I’m not sure why is that number so large. I say this because the Mnt margin req on writing an SPX put is around 38k at current prices. Is this because margin req goes up during market turmoil?

    I run this strategy with a 180k portfolio, where I keep around 30k in cash/bonds. How can I know I’m not risking blowing up?

    1. That’s why I calculate my leverage ratio the way I do. At 1x you keep enough money to cover a drop in the S&P500 all the way to zero, i.e., 100x your strike. At 2x you keep enough money to cover a 50% drop in the S&P.

      Simply calculate how much the S&P has to drop to wipe out the portfolio. In your case, that’s 1,800 points below the strike.

  13. I don’t really understand the intuition behind this strat. Like the numbers are cool and all, but I feel like I’d learn a lot more if the intuition was explained as to why these were picked, specifically:
    – Why weeklies?
    – Why puts? Seems like the market has a bias towards going up. A lot. So why do puts instead of calls?
    – Why *14 minutes* before close????

    This post just seems like “here’s a strategy. Here are the results.” Tons of work put into this post, for sure, but I don’t really get why this is done or tried in the first place. 14 minutes before close doesn’t seem ad-hoc for example. So the intuition is probably very obvious to the author, but not for me.

    For example, I buy $QYLD because the intuition makes sense to me: the market goes up, but it rarely goes up massively in a short amount of time. And if it does, your calls are covered. You don’t get to participate in upsides that spike, but you’ll win most of the time. And if the market crashes, your covered calls will print and you can keep buying new shares at a lower price (until you run out of money for shares). And, for the most part, the market trends upwards in the long-term, most of the time, so the underlying is more valuable over time (i.e. a market crash just translates to the fund DCA’ing).

    1. Excellent questions!

      Lots of people have an intuitive assumptions about things. These intuitive assumptions may differ between people. Validating (and invalidating) intuition is one of the primary reasons I do research. Borrowing a term from systems analysis, I’m “characterizing” various strategies to see how they have behaved. In this post we’re looking at one specific strategy. I have characterized hundreds of different strategies over at

      -Why weeklies? It doesn’t have to be. I have researched durations ranging from 0-3 DTE all the way to 365 DTE (LEAPS) because I asked the same question. Each performs differently across a host a metrics.

      -Why puts? An intuitive answer would be that selling a put is a bullish trade. If the market has a bias to go up, then this is the instrument we’d want to use vs selling a call, which is a bearish trade. But don’t take my word for it. Pull up the short put and short call backtests in the link above and use the data to make a research-backed decision.

      -Why 14 minutes before close? Because that’s the only time available in my datasets 🙂 When looking at longer-duration strategies, the time of entry has a nominal impact. However, for short duration strategies such as 0-3 DTE the dime of entry can have a larger influence on results.

      Compare QYLD and QQQ side by side. Head over to Portfolio Visualizer and put QYLD in one portfolio at 100% and QQQ in another portfolio at 100% and compare the results. Investing in QYLD would have doubled your money while investing in QQQ would have nearly quintupled it. ATM short calls on major equity indices regularly lose money and are a net drag on performance. If you were to replicate what the index does, you’d encounter the same negative returns on the short calls.

    2. If the market tends to go up, you want to sell puts, not calls.

      I have written extensively in the previous parts about the appeal of this strategy, i.e., the rationale for weekly options. Or the appeal of selling the downside.

  14. Just spent time to read all post in this series. Excellent, detailed write up. I’m reading on option pricing models and just ordered Whaley and plan on easing into this over the next couple years to complement my covered called. Keep it up!

  15. This is just a covered call strategy. Short put = covered call. However, covered calls are more tax efficient because you can hold the equity position forever thereby not incurring any cap gains tax. If you’re going to sell puts with no leverage, you might as well sell covered calls instead. The only reason to do this strategy is if you use leverage

    1. You are correct when it comes to selling long dated puts but this short dated put strategy is completely different. For instance, in March ’20 a covered call strategy would’ve been down 30%+ at the bottom but this kind of strategy was pretty flat depending on what puts you sold and what you held your margin cash in.
      Also, a covered call strategy way underperformed this put selling strategy and buy and hold in the rest of 2020 since you gave up all the gains when stocks bounced back quickly.

      1. You’re comparing apples to oranges. If a covered call fell 30% in March 2020, then the IDENTICAL short put would fallen the same. Similarly, if this strategy fell 0% in March 2020, then the IDENTICAL covered call would have fallen the same. As long as the strikes are chosen appropriately, then covered call is exactly the same as a short put. If the results are different, then you’re not comparing the same strategies.

        1. Yes, yes, yes. We’re all educated enough to know about put-call-parity. The difference is that *most* covered call strategies involve selling the call ATM or OTM. And my strategy involves a Put OTM, so with a much, much lower strike than most covered calls. The difference then is that March 2020 was probably one of my most profitable months. But with a covered call strategy with strikes normally used in that strategy you would have lost a lot. And likely you would have had trouble making the money back in the fast runup during the rest of 2020 after the March 23 bottom.

    2. This is false on multiple levels.
      1: I have a very different delta and gamma from the typical covered call strategy
      2: I have a much lower volatility than the typical CovCall strategy
      3: Covered call strategies may not be tax efficient at all because the shorting of the call option is a short-term gain, while my short puts are counted as 60% long-term and 40% short-term gain.
      4: I have much less record-keeping to do than the average covered call writer.

  16. It seems there’s lot of emphasis on selling puts far OTM here. Could someone explain to me why that is?
    Is it just because it will be less volatile and that is the sole goal (as you’re in retirement)?

    Because from what I found so far, selling ATM puts works overall and has highest return. You pay for that with more volatility in your returns, but it’s still far more stable than buy&hold SP500. (I’m basing this from Spintwig back tests here

    Personally it would seem preferable to sell ATM, because then you don’t need leverage to achieve good return and thus are less at risk of wipeout doomsday spikes. While with deep OTM, it’s like the volatility is more “concentrated”: your returns trend up almost like a straight line until the occasional, brief, but deep spike arrives – the dreaded “high tail wipe out event” that John keeps going on and on about.

    Is selling ATM really viable or I’m missing something here?

    Very interesting series, fantastic journey so far!

    1. Per contract you get more premium ATM than OTM. But it’s also volatile and very correlated with my my other assets. So, I opt for the more stable income from OTM with a little bit of leverage.

      Since the S&P500 will likely not go down by 3000 points in one trading day, I’m fine with a little bit of leverage. That wipeout risk is overrated.

      1. Would you recommend an ATM approach for those still in accumulation stage though? i.e. more volatility for more return?

        I’m thinking it’s good, i just want to see if anyone is aware of any serious wipeout risks with ATM no leverage, compared to deep OTM with leverage?

        i mean, lots of scaremongering with deep OTM puts with leverage having wipe risk etc. but not much discussion here about ATM so wanted to see if that’s because it’s just a terrible idea in general due to perhaps even more wipe our risk? or some other reason (besides volatility)?

        I mean from the the ATM puts trended up long term over market crashes so seems no risk of total wipeout?
        But then deep OTM was that same, it handled it fine – yet there are lots of skeptics at this level for some reason.

        But even ATM, the volatility is not that bad compared to deep OTM, far better than SP500.

        1. Yes, when still accumulating you take more risk and more equity correlation.
          I’d be concerned though that the ATM is a bit of a crowded space and a lot of the short vol premium is being arbitraged away.

        2. The returns from selling ATM are mostly due to Delta exposure, meaning that you harvest the equity risk premium. If equity risk premium is what you want, then buy and hold is probably an easier way to achieve this. On the other hand, selling OTM puts mainly exposes you to the variance risk premium. This is the premium many people (myself included) are trying to add to their portfolio.

          Also, the sharp ratio on OTM is just so much better compared to ATM. I prefer a smoother ride over a larger pie at the finish line.

          1. Very well put. Yes, that’s exactly the point!

            Very sophisticated investors can “purify” the vol premium by delta-hedging the equity risk premium (i.e., sell futures equal to the delta of your short puts). But that’s cumbersome and not suitable for us regular retail investors.

  17. Have you ever looked into using sell stop orders on futures near your strikes as a hedge? Curious how that might work to reduce tail risk.

  18. Hey Dr K! I have an updated, albeit slightly modified, version of this study over at

    The main difference is that it opens a position every trading day (yields an *average* DTE of 3, targeting 3DTE +/- 2) whereas this original study opens strictly on M/W/F. It also explores delta targets ranging form 5-delta to 90-delta (proxy for long SPX) vs just the 5-delta target.

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