January 14, 2025 – Happy New Year, everybody! I hope you had a quiet, relaxing Christmas season and a great start to the New Year. As I’ve done in prior years, I want to update you on my options trading strategy: How was the performance in CY 2024? Are there any strategy changes? How did I deal with the volatility in August and December? I also want to share some general thoughts and observations to rationalize the long-term profitability of my options strategy.
Let’s get started…
Options Trading Strategy Details
I didn’t implement any new features, but for readers who are new to this topic, here is a quick recap of what I’m doing:
- Every trading day, I write (=short) 1DTE CBOE puts on the SPX index. This has been my bread-and-butter strategy for the last 10+ years because it accounts for most of my trading profits.
- In addition to the overnight puts, I monitor the market open and write additional SPX index 0DTE puts, which expire on the same day. I would usually take a break from the 0DTE puts if the market opens down significantly, where my overnight puts are in danger of losses, and I don’t want to add even more downside risk.
- I write 0DTE calls on the SPX index. I hinted at this innovation during the 2023 update, and now I have a full calendar year of returns, and the results look pretty promising. I also write 1DTE calls very, very occasionally. But I would only do so on Thursdays before the third Friday of the month when I can write calls for the AM closing.
- Occasionally, I write longer-dated vertical put spreads, usually 30 to 180 days to expiration. I normally do so after a significant drop in the index when implied volatility spikes. They are often wildly OTM, i.e., sell a 1600 put and buy a 600 put. I try to generate a premium around $1.00-$2.00.
Discontinued features: I had mentioned in earlier posts and comments that I was planning to hedge the downside with some long VIX exposure. I bought a few VIX Call options about 6-8 months out, usually at a 24 to 25 strike. I usually did so when markets were calm and the premium looked cheap. But alas, that didn’t do it for me. Even during the market blowup on August 5, only the August contract VIX call saw a spike attractive enough to call this a hedge. The VIX term structure went into extreme backwardation, so the impact of the vol spike on the, say, December 2024 VIX call was tiny. To hedge against a vol spike, I would have to sell such a massive number of VIX calls that I would “throw away the baby with the bathwater.”
Some stats on the contracts I traded in 2024
People frequently ask me what exact options I sell every day. It varies daily, and I target no fixed percentage or index point number above or below the index level when picking put and call strikes. But here are some stats for my fellow options traders. I use the same chart format as in earlier years:
- The median overnight puts premium was 10 cents. The average was 16.3 cents. The range was $0.05 to $4.60. That’s not a typo; after the 3% intra-day drop on December 18, following the FOMC release, I sold a few “haymaker” puts for this awesome premium and about 6% out-of-the-money!
- The same-day puts and calls had mostly 10 cents premium.
- The same goes for Calls: most had a 10-cent premium, though I also sold a few $0.05 contracts earlier in the year. I’ve now moved to almost exclusively $0.10 calls.
- The mean deltas were 0.0043 for 1DTE puts, 0.0068 for 0DTE puts, and 0.009 for the calls. And I know the puts have negative deltas, but I plot the absolute values here for easier comparison.
How far out-of-the-money, and how much implied volatility (IV) do I get for my contracts? I plot those in the next set of charts:
- I wrote overnight puts with strikes around 5.3% (median) or 5.7% (mean) away from the current index. The range was 1.9% to 23.5% (not a typo; that was after the August 5 market shock!)
- The 0DTE puts were about 2.1-2.3% OTM, while the 0DTE Calls were about 1.4-1.5% OTM
- The median implied volatility (IV) for the 0DTE puts was 33.4%. Positive skewness pushes the means a bit higher to 36.1%. Occasionally, I sell puts with a 100%+ implied volatility, especially during the stress periods in early August and late December. The maximum IV for the 1DTE puts was 191.5%!
- For the 0DTE contracts, the implied vol was in the low 20s for the puts and around 15 for the calls.
When do I trade my contracts? And how does my implied volatility compare to the then-prevailing VIX index?
- No surprise here: I trade most of the 1 DTE puts right around closing time. But occasionally, I already “double-dip” and sell the next-day puts during the morning hours.
- I sell most of the 0DTE Puts and Calls at the open. But sometimes, I trade a few more contracts, usually around 10:00 and 12:00. The shortest time to expiration for a call was only 2 minutes and 9 seconds.
- I sell most of my overnight puts trade at an IV, usually 2x the CBOE VIX. The same-day puts about 1.5x and the Calls at 1x VIX. That’s about what you’d expect due to the negative skewness. Specifically, large upside moves are less likely than large downside moves. And to be sure, I know the 30-day VIX is not an ideal comparison for the 0-day and 1-day vol selling. But I still love that chart!
0DTE/1DTE Options Trading Performance in 2024
My 0DTE and 1DTE put strategy returned just under $100,000 in 2024. Notice that these returns are in addition to my portfolio returns. So, I make the gains, dividends, and interest in my Stock/Bond/Preferred Share portfolio, and the options trading supplements that. In the chart below, I plot the cumulative daily gross option selling revenue (black), the net profit (green), and the losses (red). Loss is the difference between the actual and maximum gain. The net loss is, of course, a little bit less because you made the premium. But I like to track the gross losses, i.e., everything less than making the entire option premium. As we can see from the chart, the 19 loss events (when the red line moves a step up) are spread out pretty evenly throughout the year. Every calendar month, I had at least one loss. April and December had three. The longest stretch of no losses was between the August 1 and September 30 losses.
Here are some more detailed stats; see the table below:
- I traded just over 11,000 contracts. Notice that these are not 11k individual trades. One trade is anywhere from 1 to 25 contracts.
- $124k+ total premium collected, net profit $95,861.10, which is 77.3% of the gross revenue. I call this the PCR = Premium Capture Rate. It’s not the best PCR ever, but certainly nothing to sneeze at either.
- The overnight puts are my bread-and-butter business, accounting for almost half of the gross revenue and two-thirds of the earnings. The minor “loss” was due to a small trade error: I sold two puts too many and bought them back immediately. The 2-way commissions plus the $30 in premium not earned caused a $35 gross loss, and the net loss was about $5.00. But everything else worked out just fine.
- I also traded a few overnight calls, but only occasionally, when the expiration was in the AM, i.e., on the third Friday of the month: $650+. Not bad.
- The 0DTE puts performed poorly this year, with only a 32.2% PCR. Although this figure looked better all year, the December losses dragged it down.
- The 0DTE calls compensated for the poor 0DTE put performance: they earned me an extra $21.5k with a PCR of 61.5%.
- Also, isn’t that intriguing!? The S&P 500 was up 23% (price index) and 25% (total return index), and my 0DTE short calls (i.e., selling the upside risk) did better than the 0DTE short puts. In any given year, the general direction of the stock market predicts very little about the profitability of the 0DTE put vs. call selling!
How to deal with volatility: August 5
Monday, August 5, 2024, was a day to remember in the short-volatility world. It reminded me of the February 5, 2018 meltdown. On August 2, when the S&P 500 closed at 5346.56, I had sold puts with strikes between 4800 and 4975. Between 7% and 10% out-of-the-money felt safe at the time. The premiums were also quite impressive, between $0.40 and $1.15. But on Monday, the market opened at 5151.14, already down almost 200 points or about 3.66%. My short puts had rushed well past the max price I usually set before throwing in the towel, even though their strikes were another 175 to 350 points from the index level.
So, I consciously decided that the market was likely overreacting to the Bank of Japan’s interest rate move and decided to do nothing. My instinct was that it didn’t make sense that a surprise central bank move in Japan would derail the US economy and financial markets. It ended up being the right thing to do. The index bounced around in the 5,100s but ended at 5,186, far away from my strikes. I made the entire premium, even though intra-day, I had wiped out about four to five months of options-selling income.
How to deal with volatility: December 18-23
December 18 is probably still fresh in everyone’s memory. The FOMC met that day and announced its interest rate decision. And rocked the boat by throwing cold water on investors’ rate-cut optimism. Within the last two hours of trading on December 18, the S&P 500 fell by 3%. And it knocked out my stop-loss orders. Even worse, I got a two-for-one loss that day because, after the first stop loss was executed, I sold more puts, further out of the money, only to get stopped again on those as well.
Next, I had a loss on my 0DTE calls on December 20 and another on the 0DTE put side on December 23. What saved my December performance was the fact that the 1DTE puts made so much money around that time to compensate for those losses. Notice how the black line shoots up during that time in the cumulative return chart above. Well, you win some, you lose some.
Longer-term put spreads
Despite my stern warning in an earlier post, I occasionally sell longer-dated vertical put spreads (some call them “credit spreads”). I always target 30 to 180 days out. Specifically, I’d sell one put far out of the money and buy back one even farther OTM with the same expiration date. The long put helps with margin management. I target a premium of at least $1.00 and typically sell such spreads when we go through a volatility spike. I plot the cumulative returns below.
I made a total of about $9,700 extra from those trades. Not bad! But this portion of put selling was definitely a bumpy ride! August 5 sent me down a cool $7k, but the vertical spreads quickly recovered. In fact, on August 5, in response to the big vol spike, I sold some additional spreads with net premiums between $3.35 and $6.25 for December and October, with strikes for the short put between 1600 and 2000 and 600 and 1000 for the long put. It didn’t look very likely that a central bank surprise halfway around the world would take the US stock market down by 3000+ points or 62% in just a few months. So, I’ve now gotten into the groove of selling between $1,000 and $1,500 worth of put spread premium expiring monthly. It’s small potatoes compared to my other options trading activities, but it takes very little time, and every dollar matters.
The overall portfolio in 2024
How did the rest of the portfolio perform? First, let me display the CY 2024 return stats; please see the table below. I report stats for bonds (10-year Treasury benchmark), stocks (S&P 500 total return), and a 40/30/30 benchmark, i.e., 40% stocks, 30% bonds, and 30% cash (i.e., short-term safe assets, like T-bills). Why 40/30/30? My taxable options trading portfolio at Interactive Brokers is about half of my financial assets, while the other half, all in tax-advantaged accounts, is 100% equities. Since I like to have a weighted overall allocation of 70% equities, 15% bonds, and 15% cash to hedge against Sequence Risk, I’d need to target 40% stocks, 30% bonds, and 30% Tbills portfolio in my taxable account.
The put selling contributed 4.8% to the annual return. 18.3% came from the other part (equity mutual funds, preferred shares, bonds, cash). The total return was 23.9%. That may be a bit smaller than a 100% equity portfolio (+25%). But that’s an inappropriate comparison because I’d never want to be 100% equities in retirement. Compared to the 10.5% I could have gotten from the 40/30/30 benchmark, my 23.9% looks spectacular.
Also, notice the impressive put writing risk vs. return stats: The annualized risk was only 0.4%, and the Information Ratio was 10.62, which is fantastic. Also, notice that the monthly put writing returns actually had positive(!) skewness, negligible betas with both bonds and stocks, and extremely low correlations to the other returns. Of course, over longer horizons, say the last 10 years, my options trading IR was a bit more modest. “Only” 3.0, but that’s still very fantastic. There aren’t too many hedge funds with an IR/Sharpe Ratio of 3!
Interesting Research on Options Trading Strategies
The idea of selling insurance for profit is neither my invention nor new. If you don’t believe some random guy on the internet like me, I want to provide some additional reading material to support the philosophy underlying my strategy.
AQR’s Paper “Covered Calls Uncovered”
In 2015, there was a great article aptly titled “Covered Calls Uncovered” in the Financial Analyst Journal (FAJ), the in-house journal of the CFA Institute. Two brilliant researchers at the famed hedge fund AQR wrote it: Roni Israelov & Lars N. Nielsen (2015) Covered Calls Uncovered, Financial Analysts Journal, 71:6, 44-57. Available online: https://doi.org/10.2469/faj.v71.n6.1.
The article is free to CFA Institute members like myself but likely behind a paywall for everyone else. But I like to summarize it quickly: The authors first simulate the returns of a covered-call strategy with at-the-money strikes. It’s not even close to my strategy in at least two dimensions (strike and days to expiration), but bear with me. The authors then split the covered call returns into different components:
- A constant 0.5 Delta Equity allocation. (=Passive Equity) Why 0.5 Delta? At inception, the covered call has a net 0.5 Delta, +1.0 from the equity portion, and -0.5 from the short at-the-money call.
- A Delta-hedged short-call position. The delta-hedging is daily. Notice that the short call option had a Delta=-0.50 at inception, so we would pair this with the remaining 0.5 equity allocation. But over time, that Call delta might change. Because we want to distill the pure short-volatility component orthogonal to any equity beta, we adjust the equity exposure to make the net equity exposure precisely zero. (=Pure Short Volatility)
- The difference between the initial call Delta and the dynamic Delta-hedging in Part 2. Notice that component 3 picks up the “slack” from component 2 and will guarantee that the sum of the three components will always be the simple covered call strategy, i.e., 100% equities minus a Call option. (=Equity Timing)
Why is there (implicit) market timing in a covered-call strategy? A covered call position will have varying deltas on its way to expiration. And the deltas look like a “valuation” strategy (not to be confused with value investing, the topic of last month’s post). For example, if the index falls, your covered call’s net Delta rises. So, you’re essentially betting on mean reversion, i.e., after the fall, you throw in more equity exposure and hope for a recovery. Likewise, if the index rises, your delta declines, so you take less equity risk. Again, this looks like a valuation or mean-reversion strategy.
In any case, the authors calculate the return stats of the covered call strategy and its three components. I have included a screenshot below:
Analysts Journal, 71:6, 44-57. Fair Use permission.
Some observations:
- The covered call strategy has a slightly higher Sharpe Ratio than the passive equity strategy. Notice that the Passive Equity strategy is only a 0.5x equity exposure, so the excess return of a passive equity strategy would have been around 7.0% (simple) and 6.4% (geometric), beating the covered call strategy. However, 100% equity would also have a much higher volatility (17% vs. 11.4%).
- Short Volatility had an impressive Sharpe Ratio of 0.98. You get a 1.9% extra return for only 1.9% risk! Also, people always wonder how statistically significant an alpha is. If we want to test the Null Hypothesis (H0) that the short-vol strategy doesn’t add any alpha, we can calculate the t-stat as IR times the square root of the years. In this case 0.98*sqrt(18.75)=4.25. We can easily reject the H0 of zero alpha (p-value = 0.00001)
- Equity timing adds a lot of volatility with very little return. The IR is only 0.1, so the slight outperformance is not even statistically significant. (The t-stat would be only 0.43, with a p-value of 0.433, so we cannot reject the H0 at any reasonable significance level.)
The takeaways from this article are threefold. First, the pure and distilled put selling part, orthogonal to any equity beta and equity timing, has a desirable risk vs. return profile. A Sharpe Ratio (actually, Information Ratio (IR) would have been the better terminology in this context) of just under 1.0 is quite impressive. Recall that this 1996-2014 simulation includes two of the worst bear markets in recent history, with a 49% drawdown in 2000-2002 and 56% in 2007-2009!
And importantly, this is only the most basic options strategy, i.e., plain-Jane monthly covered call selling with at-the-money strikes. With my more sophisticated approach and selling the even more attractive options, i.e., deeply OTM puts and calls, I have generated an IR of about 3.0 over the years. So, keep a portfolio of productive assets (stocks, bonds, preferred shares, etc.) and then add the pure option-selling/short-volatility portion only, but not the noisy and risky and almost return-free market-timing portion. Covered call writing, cash-secured puts, etc., are for the unanointed masses and YouTube Fin-fluencers. Savvy investors should do what I do!
Second, to get the best risk vs. return profile, it’s recommended to set the DTE of your options as low as possible, tantamount to the Delta-hedging in the AQR paper. In other words, you never want any day-to-day varying delta exposure from your short options. Instead, reset your bets every day and start anew. And just to be sure, I don’t need to do any additional Delta hedging because a) I sell my puts so far out of the money that they have negligible Deltas at inception, usually below 0.01, and b) they all expire after one day anyway.
Third, the article provides the perfect rationale against attempting to make back your money after a put-selling loss, which is often called the “Wheel strategy.” See my post from last year: Part 12 – Why the Wheel Strategy Doesn’t Work. You don’t want to mix options selling and market timing, and the AQR paper has the receipts: the market timing part is very volatile and has low or even zero expected return. You’d ruin your Sharpe Ratio when chasing after past losses. After 13+ years of experience trading this strategy, I recommend that a loss is water under the bridge; it’s best to reset your bet every day and try again.
Robert Litterman’s “Who Should Hedge Tail Risk?”
The second link I want to share is a great paper by Robert Litterman, also published in the FAJ: Litterman, R. (2011). Who Should Hedge Tail Risk? Financial Analysts Journal, 67(3), 6–11. https://doi.org/10.2469/faj.v67.n3.7. It, too, is likely behind a paywall. However, the almost identical content is also available on YouTube; please check out Robert Litterman’s video here. If you don’t know, Robert Litterman, a former partner at Goldman Sachs, is the guy from the famous Black-Litterman model. And yes, the “Black” in Black-Litterman is Fischer Black from the Black-Scholes options formula. Small World! And a fun fact and bragging right: I know Dr. Litterman. We’re both University of Minnesota Economics PhDs:
Anyhoo, Litterman makes the excellent point that hedging against tail events is often prohibitively expensive. Indeed, it is so costly that instead of hedging against tail risk, it can be preferable to simply reduce exposure to this risk factor and then sell the tail risk insurance for an extra return.
He presents an example of an investor with a 100% equity portfolio (=portfolio 1). The 2005-2011 window would have been a frustrating experience: Only 0.9% annualized returns but 24.5% annualized volatility; see the table below. Hedging the tail risk with a 10% allocation to a long-VIX ETF (ticker VXX) as in portfolio #2 would have reduced volatility, but you also gave up 1.55 percentage points in return. You would have done better simply scaling down the risky equity position to 75% and holding 25% T-bills as in portfolio #3: Your volatility is lower, and your average return would have been higher than any of the #1 or #2 portfolios. Finally, reducing your equity position to 50%, shorting(!) the VIX ETF, and holding the rest in T-bills would have been the best option (portfolio #4) in terms of both return and risk.
What I’m doing in my taxable account is precisely what Robert Litterman proposed! I can’t hold 100% equities because that’s too much tail risk, especially in retirement when you have the added headache of Sequence Risk. One could do a 75/25 portfolio, but that’s still not ideal. We should do 50% equities and add the short-vol as another return-generating engine while keeping the rest in lower-risk, diversifying assets. I don’t think the 50/10/40 split is gospel, but the direction toward less equity beta and more volatility selling is undoubtedly optimal.
Robert Litterman also had another great nugget. For example, he lists this question to be considered before buying tail-risk insurance:
“Is the governance structure […] leading management to consider buying tail-risk
insurance […] to protect itself, which may not be in the long-term best interest of the fund’s beneficiaries?”
What a great point! Part of the tail-risk insurance demand is likely due to people working at and running institutional investor portfolios, such as pension funds, endowments, sovereign wealth funds, etc. The managers likely buy insurance to protect their interests, often to the detriment of the funds’ ultimate owners and beneficiaries. This leads to market inefficiency due to a principal-agent problem. As long as this inefficiency exists, it is payday for us options traders! So, the profitability of selling tail-risk insurance is not just a statistical fluke. Instead, there are some fundamental economic reasons to justify this rich options trading premium.
As a side note, I understand my options trading differs from the VIX selling Litterman proposes. But I claim that options selling is an even better route to selling volatility. If you remember, I always warned against shorting VIX because it seemed to have too much tail risk for my taste and an unattractive risk vs. return tradeoff; see my 2017 blog post on that topic. So, Litterman’s simulations likely underestimate the benefit of selling tail risk.
Podcast appearances
Finally, I want to give a shoutout to the podcasters who waded into the options trading topic and were generous enough to feature me in 2024:
- Jason at Two Sides of FIRE had me on the program to chat about my options trading strategy.
- Jason also featured David Sun, one of my option-trading buddies. I also recommend checking that one out—it has lots of great information from a guy who runs an options-trading hedge fund. I’ve learned a lot from David! David also has his own podcast, “The Trade Busters.”
- David Baughier at Forget About Money interviewed Brad Finn and me about our respective options trading experiences. The interview is an excellent introduction to options trading if you’re new to the subject.
Conclusion
OK, we’re at 4,500 words; it’s time to wrap up. 2024 was a terrific year for options trading, both in dollar and percentage terms. I sold the 1DTE puts far enough out-of-the-money that all puts made their full profit. My same-day puts had a bumpier ride, but I’m glad I had the supplemental income, as I am now taking less risk with my 1DTE contracts. While the percentage return dwarfs compared to the 25% total return in the S&P 500, it’s nice to have that additional return on top of my other portfolio.
How was your options trading experience in 2024? I look forward to your comments and suggestions below!
Please check out the Options Trading Landing Page for other parts of this series.
Title Picture Credit: WordPress AI
Thank you for this post. This is going to be an excellent read
You bet! And you beat everyone else at 1:15 am to get the first comment in. You even left a comment before reading the post, which shows real commitment! I love it! 🙂
I’m on the other side of the planet, so had a head start 🙂
The read was indeed excellent.
I would like to share that on late October I started running this strategy too.
Having mostly 1 up to 3 contracts at a time.
It went pretty well until December 18 but then I lost 88 points below the strike (didn’t use STP) and lost 3x times the money I earned up to that point.
And it could have been even worse as at least I only had 1 contract at that point.
Then since I really didn’t want to lose money on 2024 (due to some tax calculations) I took high risk and sold 2 contracts with premium 16$ & 37$ for December 30 and luckily it went well and I finished the year with a small profit from the option trading.
Now starting 2025 I’m mostly selling 1-2 7DTE contracts, around a TMV of 1%.
The 7DTE means I only have to trade 1 or 2 times a week, which is less of a hassle and also reduces commissions, yet hopefully still running enough “gambles” a year to bring the Central Limit Theorem into effect.
May I ask, how on August, your STP (that you canceled) almost made you loss several month of profit, yet on December when the STP indeed took place (twice), you only lost about 1 month of profits?
Did you just have less contracts on December?
Wow, that is painful to lose that much on one day. For 0DTE I always use a STP.
The August non-STP was a conscious decision, as explained in the article. The put prices were quite high at the open. Even though the S&P was still far above my strikes. This was mostly a vega and not so much a delta effect. I decided to sit it out and it was the right thing to do.
In December I lost on several 0DTE stops. Since I set the STP right after the trade initiation there was never any possibility that the index falls so far where the price goes beyond my usual STP without me noticing.
I did not significantly change the number of contracts between August and December.
Mr ERN … 3 months from your previous post😊 the world is going crazy … you words are needed 🙏
Well, I’m still up YTD. Stick with the plan, everyone!
Fantastic read again, I admire your sharing of so many stats on your strategy. I also noticed on December 18 that the premiums kept ballooning after 3pm Central time. I sold some puts 7% OTM a bit after the CBOE close, around 3:19pm or so, and collected $7.60 of premium, so even further OTM than you did. It is impressive how much these volatility events contribute to the overall returns of this strategy.
Something that you don’t necessarily touch on, but seems important to me, is execution at the close and balancing premium capture with the probability of filling the trades. When targeting such low premiums, securing $0.15 versus $0.1 can make a bit difference to the profitability of the strategy. I would be interested if you had insights to share on that.
Hi BigEarn
Just to be sure the money you made with option writing has nothing to with the wirhdrawl rate. For example if you would need 90 k for living your wirhdrawl rate would be 0 because you earned all the money you need already. It would mean that all dividends could be reinvested is that correct?
Furthermore are you aware of a study which checked if it makes sense to withdraw more money when we have a very good year of stock returns like 2024? For example when my SWR would be 3% and if I withdraw 6% now and invest it in bonds or do box spreads so that I do not have to withdrawl any money in 2025 if the market drops. Or is that already market timing and it would be better just staying in the market
Thanks a lot and once again a great post
The options income helps me with my withdrawal strategy because I add an alpha source and I don’t have to withdraw from my other assets.
Your second question: Depends on what you do with the money you withdraw. If you withdraw a higher % when the market is doing well, that would be a terrible strategy. Your consumption would then be more volatile than your portfolio: You’d then withdraw a smaller % when the portfolio is down. I’d prefer a CAPE-based strategy, where you cushion your withdrawals through a valuation adjustment to your WR. See parts 18 and 54 of the SWR series for more details.
But what you describe sounds more like an asset allocations strategy: you take money from stocks and invest it in bonds if the stock market rallies. You would do so anyway with regular rebalancing. If you even go beyond rebalancing and you lower the equity % if equities are up a lot, that’s a valuation strategy. That seems like a valid strategy, if done right.
Whoa, you beat me with that $7.60 premium! Congrats!
I’m able to find competitive fills. For example, there is often a long range of strikes with a B=0.10 and A=0.20. You put in your limit order at 0.15 at a few places and you will get filled at way better strikes than at the best one with a B=0.15. So, this is the daily dance as a trader. You get a feel for where you need to go.
Thanks for the insight! I like the idea of putting several limit orders at different strikes in the chain. I definitely see the advantage of targeting the midpoint if possible, but it can be more challenging to capture the ask if the spread is tight, like 0.1-0.15. Better be close to a strike where either the bid or the ask is higher.
Well, if there’s a 0.05 spread everywhere, that’s fine, too. For example, at 5820 you have bid=0.1, ask=0.15. At 5825 you got bid=0.15 and ask=0.20. Then sell at 5825 at 0.15. There are stagnant sell orders at 5820 but nobody is buying there yet. So, you might as well capture the 0.15 at the best (=lowest) strike 5825.
How long do you let a midpoint limit order sit before being accepted or cancel to move on? It seems that often the order won’t get executed as the option chain pricing is dwindling, or it does but only when the market moves against you and a whole range of strikes get prices pushed up.
I know there’s art as well as science to getting competitive fills, but wondering if there are any best practices based on pricing, momentum, time – or anything!
I have no fixed time limits. This is done according to feels right.
Hey,
When you send your sell orders in multiple strikes, how do you make sure you don’t end up selling more than you intended to?
Are you anyway using your maximum allowed margin (which is reasonable as it’s 0dte and you use stp) and then rely on IB not letting the other orders go through?
Example: If I have capacity for 6 more puts, I try three different strikes with limit orders of size 2. Also, as you indicate, even if I have less capacity, once the limit is reached, IB cancels the other limit orders once the last order goes through.
Thanks for this fantastic article! Thanks for everything Karsten!!!
You bet, Karl! Thanks for your continued support!
Thanks for the article, if I understand correctly: You’re selling 7-10% 0DTE & 1DTE OTM naked SPX puts left on to expiration? TastyLive has done several 0DTE studies that strongly suggest that adding further OTM long puts (“the wings”) not only limit tail risk exposure but markedly improve capital efficiency (important for smaller account) making them well worth the cost. Most of their studies are on neutral strangles and synthetic strangles (their studies DO indicate that the short put side of the strangle has, in this bull market contributed the bulk of the profits) at various deltas where they explore win rates, net P&L, worst loss and CVaR (conditional value at risk). They study the impact of the VIX and 1DayVIX.
Their various studies have included employing strategies as buying 0DTE vs longer dated wings (for when one recenters the strangle or reuses the insurance for tomorrow’s trade). Their 0DTE data is granular to every ten minutes explore the impact of increasing intraday gamma risk; they explore the value of using stops, efficiency of closing or recentering trades at a certain portion of max credit. It is truly fascinating. From what I gather from their astounding research is that 0DTE premium selling is very risky, but risks can mitigated by entering 0DTE at the open, only when the VIX is high, always buy the wings, sell the 20 or 30 delta strangle and close winners at 15-30% (depending on delta) of max credit, let losers go to expiration. Risk management & research seems to underlay all of their discussions. Fascinating stuff.
No, there are no fixed % targets I pick. The OTM% varies depending on the vol regime.
I think the wing protection is mostly useful for higher-Delta strategies. If you’re selling 0.10 puts and calls, there is no point of buying back a 0.05 contract. That eats up too much of your income.
But I do use the spreads for my longer-dated credit spreads.
Agree that the 5 delta insurance is expensive, relative to the premium collected. The problem with being short naked 10 delta strangle is the tail risk on black swan events can still wipe you out. You’re likely not compensated enough for the tail risk. TastyLive did a study on it. Their conclusion was, I believe, the 20-30 delta is a sweet spot for naked strangles. I think this is the study: https://www.tastylive.com/shows/market-measures/episodes/profit-volatility-and-tail-risk-10-25-2022
I wasn’t talking about 10 Delta and 5 Delta contracts. I talked about $0.10 and $0.05.
I did my own back tests and find that the 20-30 Delta puts are not attractive to me. The attractive risk vs. return tradeoff is for the far out of the money puts, not in the crowded space of high Delta puts.
Super interesting. It’s like you read my mind with something I was wondering for myself. I’ll have to check out the AQR article more as the low contribution of equity timing to excess returns relative to volatility was surprising to me. I guess we have had it it drilled in that you cant time the market, but I thought mean reversion would be stronger.
I think we crossed paths on reddit and I mentioned I was working on pivoting my portfolio to be short vol but still having delta exposure – targeting 100% exposure to SPY, but doing so with around 80% in straight owning SPY, the remaining 20% of delta achieved by being short puts.
In the event I’m assigned, I might be long 120% SPY by the shares I own, then I short calls. It’s kind of wheeling but I try to target that 100% delta. The intuition to explore was that there would be some “equity timing” value by being super long after a the market drops and underexposed when the market rises and I am called away.
Initial backtests show overall outperformance vs 100% SPY shares, but I’ll have to try and be more rigorous and I measure the contributions of short vol, long exposure, and market timing.
Thanks! You’d need a pretty long backtest to find any significant results. Over 18.75 years, these guys found an IR of 0.1. Of course, there will be instances where you will do much better or much worse. Recently we’ve simply had choppy markets with relatively fast mean reversion. Your timing would have done well. If we go through massively long momentum moves (like 2007 to 2009) you’d feel the pain, though. 🙂
Fantastic write up! Can you tell us about how your stop loss strategy has evolved? Previously it seemed like you immediately set stops upon writing contracts, but in the Aug5 example it seems like you didn’t have any stops on. When do you set stop orders and for how much?
Well, conveniently, you can’t do a STP during the off-hours. So that helped me on August 5. But for the 0DTE puts on December 18, I had STPs and they prevented a really nasty loss that day.
I usually set the 0DTE stops at 2-3 weeks of options income.
For 1DTE, I use a about 3 months of of trading income.
Great insights. How did you choose 2-3 weeks income for the 0DTE stops and 3 months for the 1DTE? For example, did you do any analysis on a tighter stop (eg 1 week income) for 0DTE and find that you would be stopped too often and the net income would be less than the 2-3 week strategy?
I played around with different STPs and it’s a constant dance with tradeoffs. Too many times I was stopped when the price just nicked that STP and i lost money for nothing. Then I set the STP higher and the next time, I get STPed right there and I regret not setting the STP lower. There is no exact science.
I don’t like to give precise numbers because I sometimes change mine and I don’t want everybody on the internet to set the same STPs, for obvious reasons. 🙂
Hi ERN,
When you mention 2-3 weeks of options income for 0DTE stops, are you referring to 2-3 weeks of income from that specific portion (like 0DTE puts), or from the overall strategy’s income?
Looking at the ‘Cumulative Gross Revenue, Net Profits, and Losses’ chart, it seems that each loss was significantly smaller than 2-3 weeks of the total strategy income.
Thanks!
2-3 weeks of that specific contract, not all all contracts. So, the observed losses are usually much smaller because not all contract types go sour all in one day, as you correctly point out.
What are you thoughts on simple tail-edging strategies? E.g. one could write a short-dated (<45 DTE) OTM PUT and buy a multiple of the quantity of stock held + shorted PUTs at a lower strike but same DTE, so the short PUTs cover the cost of the longs. Example: you own 100 units of ACME stock that are trading at $100, you write 1 of next month's monthly PUT on ACME 10% OTM (strike is $85) and buy 4 25% OTM PUTs (strike is $70) and let's assume the total cost of the trade is $0 for convenience—i.e. the premium received covers the premium paid + fees exactly. If ACME stock doesn't move, the contracts expire and nothing happens. You risk getting PUT the stock but not enough to make the long PUTs worth anything. If, instead, ACME goes down 50% by the expiry date, you should get the following:
– Your short PUT is assigned at $85 (now you hold 200 ACME stocks)
– ACME is trading at $50
– Your unrealised loss compared to the initial situation (not actual cost, just were your position was when opened the edge) on ACME stock is $8.5k ($50 loss on the 100 stocks you held + $35 on the stocks assigned through the short PUT)
– The intrinsic value of the long PUTs should be at least $25 per contract ($75 strike – $50 current price) but should be more due to a spike in volatility, although the time value decay would have made them worthless very quickly otherwise. Let's assume we only get the $25 of intrinsic value. The value of our long PUTs is $25 * 400 = $12.5k. So, although ACME is down 50% we're up $4.5k.
What am I missing?
Have you done this in practice?
The put option premium decay may not be as rapid as you claim. So, your 4 long puts might be very far out of the money. If the stock ends up between the strikes you lose on the short put and gain nothing from the long ones.
I haven’t tried that, no. And yes, the option premium decay may not be as rapid, but say you’re able to pay little-to-no money for such a set up, the only risk is getting PUT the short contract. If that’s acceptable or if you’re just willing to endure the cost of going only long the OTM PUTs, would the set up work in case of a sudden market (or ACME stock price, in the example) drop?
I’ve done a similar strategy, called 1-1-1: You buy a put OTM, then sell two more even further OTM, but for more premium than you paid. In taht case, you’d make a ton of money if the index lands between the strikes.
Your assumption of “say you’re able to pay little-to-no money for such a set up” is not possible in real life.
Thanks for the update. One idea: If you are trying to capture declining IV, it may make sense to use options with different durations to hedge gamma and theta and isolate vega. The purest form of such a play would be a ratio calendar spread.
True. But I don’t like to take consistent bets on the direction of IV. My strategy should always work, whether IV rises or falls. But f we have another VIX spike, your suggestion would be able to milk this eventual decline in Vol.
Always the most interesting post of the year. Given the number of trades, have you considered whether you would qualify for trader status under IRS Section 475? See https://www.irs.gov/taxtopics/tc429 It might save you on some taxes and get you some additional deductions, particularly if there is a new RIA business involved. But you would have to run the numbers as I am not sure how Section 475 and 1256 work together or if you have to opt for one side or the other. Because basically you are moving some Schedule D activity to Schedule C.
Also, if your overall annual returns on this for the year are about $100,000 and that represents 4.8% of the total returns of all the investments, it implies a total portfolio value of just over $2M (100/.048 = 2,083). That seems low for you given the history of the blog. Or are there other invested/investable assets that are not being included in that calculation?
Thanks!
I already enjoy the benefits of writing off business expenses in my current setup, so I would gain nothing from trader status. But I’m afraid I’d have to pay self-employment tax on my trading profits, which would be awful.
About the other question: $2.3m. Taxable brokerage accounts only. I can’t do this strategy with real estate investments and retirement accounts. So, to be fair: that 4.8% extra return is only in that portion of my net worth. It would be watered down a lot if spread over the entire net worth.
Very brave to forgo the stop loss on August 5th! Glad that the markets behaved rationally in the end and looks like that decision alone netted you ~$20K.
Two questions:
1. Why don’t you trade overnight calls daily? Since you’re already trading overnight puts the calls would have near-zero additional margin impact so seems like leaving easy money on the table.
2. You acknowledge the VIX30D is not a great predictor of 0/1DTE volatility, yet it still seems to be your volatility benchmark of choice. Why not use VIX1D?
Thanks as always for sharing this valuable information.
Brave! Lucky! Smart? Maybe a bit of that, too. Yes, that would have cost me about $27,000 if I had closed my positions at the wrong time. Not the worst loss, but I’m glad I kept my nerves.
1: I’m considering 1DTE calls, but haven’t found attractive strike/premium pairs in a long time. An exception is the 3rd Friday of the month
2: VIX1d would be good. I can’t seem to get my Python downloader to get the time series from Yahoo, though. I download the time series but only the last observation shows up in the download. If you have a suggestion, please let me know.
But I also have my own proprietary short-term vol model that’s always
Delayed reply but better late than never. You can get VIX1D data for straight from the CBOE website and is updated daily. As of now the direct download link for csv formatted time series is: https://cdn.cboe.com/api/global/us_indices/daily_prices/VIX1D_History.csv however it may be more stable to reference the landing page: https://www.cboe.com/us/indices/dashboard/vix1d/
Thanks for the link! This is great!
ERN and Vijay – looks like VIX1D has only been around since mid 2022. Is this a fundamental limitation to using this as a predictor of 0/1 day volatility? I.E. not having historicals covering 2020-2021, 2018, 2008-2009, etc.
Also, simple visual comparison of VIX and VIX1D shows that they can deviate from each other meaningfully. I suppose this might be the opportunity for higher-signal 0/1-day vol predictions, but curious if you both have any thoughts on this?
I’m planning to do the analysis on VIX1D predictiveness regardless, but welcome any input.
Yes unfortunately it’s a newer index so won’t be helpful prior to mid 2022 (around when everyday expirations were introduced). My experience matches yours that while correlated they can deviate meaningfully at times.
Absolutely. Especially during vol spikes and around important data releases or FOMC dates, the 1D VIX can look very different from the VIX30. But for us 0/1DTE traders, the 1d VIX is certainly more important.
What would be attractive strike/premium for 1DTE calls in your opinion?
I have not sold 1DTE calls. Except, occasionally I do the 1DTE when we have the AM expiration on the 3rd Friday of the month.
These posts have become almost like a late Christmas gift for me! Thank you for being our options Santa delivering such a gift to read and absorb.
Thanks Karsten! I am sure many readers here made lots of money using your option trading strategy. Thanks for sharing unselfishly!
I had a question on why you would need trading 0DTE puts. The maximum total number of put contracts that you can sell at any moment is dictated by your account margin size.
1. If 1DTE puts provided better results, why not sell as many as 1DTE puts without leaving any margin?
2. If after selling 1DTE puts, there is not enough margin left, how can you sell any 0DTE put which also needs margin to cover?
3. If you leave any margin for 0DTE trade, the margin is not used for more profitable 1DTE trading which can potentially generate more returns.
Good question:
1: 1DTE gives you more return, but also more black swan risk (see August 5, 2024). hence, I diversify into 0DTE: less return but also less skewness risk.
2: if you’re maxed out with 1DTE, you can’t sell 0DTE. So, I sell 1DTE than I could and keep some extra margin reserve.
3: see answer to #1
Got it. Thanks!
The overnight black swan risk can be very damaging if there is no STP on put. Can I say if the overnight 1DTE puts have STP, the risk is largely mitigated? Understand you may not set the STP for the put as you sell the put after regular trading hours.
There are no automatically-executed STPs during the off-hours. You’d have to do them manually.
I sold and set the STP on 1/24 right before market close for 1DTE put expiring on 1/27. The black swan event during the weekend triggered the STP right at the market opening. How to mitigate the black swan risk is still quite challenging. Selling puts without setting STP still quite risky. But STP can also wipe out lots of profit by false alarming. Very tricky.
I know, this was a tricky situation. The STP doesn’t execute overnight. I had to manually sell the some contracts late on Sunday night and early on Monday morning. The closing prices were between 1.80 and 3.20. Tough losses, especially considering that the “STP” was a false alarm and nothing bad happened on 1/27. But it’s better to hedge the downside like that.
Thanks! Merry Christmas in that case! 🙂
a piece of nugget: for 2024, if you measure daily return from previous close to today’s close, the average return is positive. (of course, because the total return is positive) But if you measure from open to close, the return is actually down. So all the up moves happened overnight (futures market?). And the total return during the day is actually negative!
That’s a very intriguing insight. Thanks for sharing!
Note that the intra-day vs. overnight changes over time. During the pandemic, the overnight returns were bad, intraday were OK.
But recently, we’ve gone back to back to very attractive close-to-open return: high average and low risk. Open-to-close is all risk, no return.
Karsten, thank you for sharing the detailed summary. You mentioned that the median premium collected for 1 contract is about $0.10, which translates to roughly 0.1x100x365=3,650 USD per contract annually (however, I’m not sure if this is a good approximation, given potential outliers like the premiums on Dec 18 and during weekends). Assuming the total gross premium for 2024 is $124,000, this suggests that you need to hold approximately 124,000/3,650~34 contracts on average (again, I realize my back-of-the-envelope math might be off)
Using these figures, the leverage would be around 34×5,400×100/2,300,000 ~ 8, calculated as the total notional value of option positions divided by the capital. However, in some earlier articles, if I recall correctly, you mentioned that the leverage was closer to 3–3.5. Is my estimation wrong? I guess you do not really carry so leveraged positions?
If you refer back to some of the earlier articles that Karsten published, his definition of leverage is based on the value of the notional. A strike of 5700 would give $570k, versus a $125k of capital against it, that makes a leverage of 4.5. No leverage would be selling a cash-secured put (having $570k on the account) versus needing only $125k thanks to portfolio margin.
Unrelated, but there are only 252 trading days in a year, not 365
Good reply! Thanks for clarifying!
This question was already answered by Matt-C.
I keep around 165k in capital per short 1DTE put. If I sell puts at a strike of, say, 5600, then they have a notional of $560k. That’s about 3.4x my capital. Hence my leverage is 3.4x.
Thank you for the clarification, but I think I’m still missing something obvious. You mentioned that you traded over 11,000 contracts last year. That amounts to 11,000 ÷ 256 trading days, which is approximately 44 contracts per trading day. As I understand it, you hold the options until expiration (except for stop losses and occasional early closings). Does this mean that, intraday, the total open position could peak at 44 contracts across both calls and puts, including 1DTE and 0DTE?
Yes. About 14 1DTE puts, 8 0DTE puts, 22 0DTE Calls on average.
“Thank you, Karsten. I understand the figures now. When you say you have 3.4x leverage, you are accounting only for the 1DTE puts held overnight. The 8 0DTE puts add additional leverage/margin requirements only intraday. Meanwhile, the 22 0DTE calls do not increase the maintenance margin, as you are effectively short a strangle. Is my understanding correct?
Exactly!!!
Thanks Karsten for sharing so much valuable details of your opinion trade strategy!
You mentioned for 1DTE you set STP at 3 months income. If you sell $0.10 premium, 3 months income would be $6 which is reasonable. If you sell $4 premium, 3 months income would be $240 which is quite large STP level. How do you adjust the STP level daily to match the premium level? Or you use average 3 months income as a fixed STP level? As you mentioned before there is lots art of setting the STP level to be optimal.
If you sell $4 premium you’d not set the STP at 60x that! I’d probably set the STP here at $20.
Great post, thanks a lot. I didn’t consider this short-term trades yet, I will certainly explore it! I just have two short questions:
– You wrote “Also, notice the impressive put writing risk vs. return stats: The annualized risk was only 0.4%…”. I was wondering how you calculate the risk. 0.4% looks extremely low to me for an option selling strategy!
– Do you use any backtesting tool/software?
Thanks again, your blog is one of the most valuable finance blogs at all!
0.4% is the standard deviation of monthly returns multiplied with sqrt(12) to annualize it.
So the monthly Standard deviation is only about 0.1%! Returns were amazingly smooth! 0.4% on average with a range of 0.2-0.6%.
I checked out optionomega. I ran al the tests I wanted in the trial period. No need to continue.
I run some of my own proprietary simulations to gauge the daily risk I’m taking.
Hi ERN, what was your typical notional exposure from the put selling in relation to the size of your option account? 1x, 2x, 3x, etc.?
Thanks for a great post!
I’m curious about your asset allocation though. Surprised you are all equities in your tax advantaged account(s) and hold bonds/cash in your taxable. Presumably that puts you in a better margin situation for your options trading. Yet the tax drag on those bonds is pretty significant.
Also I see a few commenters asking about your leverage, and indeed i think you are selling a lot more options now than described in your earlier posts. I’m curious how you think about a 1987 type situation and what your losses might look like.
I hold preferred shares that pay dividends. They are taxed at the reduced dividend rate, not ordinary tax rate.
If I liquidate stock capital gains they are taxed at the same rate. So, there is no tax arbitrage from moving preferreds into the IRAs or Roths.
I used to go up to 5x leverage for the overnight puts. And back in the day that often meant 2 days, because in the old days, we didn’t have the Tue+Thu expirations yet. That felt like more risk.
Now I have 3.5x risk with the 1DTE, but more if I include the 0DTE. But the 0DTEs have much less black swan risk.
I also write the puts further OTM. So the leverage multiple is a very poor risk measure. I now had 30 months in a row of no monthly losses with this strategy. That has never happened before. Obviously because the risk is lower!
3.5x
Hi Karsten, Thanks for your 2024 update and Good Luck for 2025!
I started paper trading to get my feet wet, thanks again for sharing your insights 🙂
Great! Good luck! How did your 1/27 go? That was a good test for the paper traders and actual traders alike.
Hi Karsten, what are the pros/ cons of using SPX? I think you initially used Mini Futures and then maybe XSP?
It seems like SPX has the same 60/40 tax treatment and would hugely lower transaction costs because of selling fewer contracts. Does selling fewer contracts hurt diversification in any meaningful way?
For XSP the commissions would be too expensive. I never did those.
ES mini futures options were the only instruments I was allowed to trade when I still had my job. I was prohibited from trading CBOE SPX options.
After I left my job, I transitioned to the CBOE SPX options only.
There is no impact on diversification when going from ES to SPX.
very helpful, thanks
Hi Karsten, Thanks for the update and your wonderful analysis with it. I have been following you for a while and have finally adapted your strategy in combination with David Sun’s to my account. 15 delta put, 6 X (7 X ) the premium collected. Takes minimal time and my net profit was like yours. I also did a documentation that if i hit a stop loss, what would have been the loss if I left them on to expire and the loss was worse. Please keep enlightening us with your options approach and results. Cheers
Thanks! That takes some guts to trade 15-Delta puts. I hope this did OK on 1/27!
Cheers!
1/27 was brutal during the night. Some of the contracts that sold for $0.10 spiked over $20 when the futures did a dive around 6am Eastern time!
True. I liquidated mine before that spike at between 1.80 and 3.20.
The put spiked during the weekend. Lots of STP must be triggered.
STPs are not triggered during the off-hours. You have to liquidate those manually on Sunday night/Monday early mourning before the NYSE open.
I mean the STP got triggered when the market opened on the Monday morning. The STP not only got triggered, but executed at much higher price than preset STP price. How to mitigate the black swan risk overnight is still tricky. You either sell the put without STP or set the STP before market close the day before. But STP can still be triggered and executed at much higher price. The STP preset price doesn’t do much protection in the case of 1/27.
The trick is to already monitor the positions on Sunday night and trade outside of regular trading hours (caution: much lower liquidity). But you can trade during that time and set a limit order.
Monitoring outside of regular hour would help. The discontinuation of the trade would still create substantial risk. Say you sell put at $0.1 the day before. When waking up before the market open, the put spike to $20 during extended hours. What would you do? Closing the position would lose substantial amount of money. “Wait and see” would expose to even more loss. STP will avoid human emotion risk, but it would only limit the loss to the preset trigger price if the trade is continued and the put price was increased gradually crossing the trigger price. Any black swan event during market close would post unpredictable risk to lose substantially. The hope is you’ll make it back long term. I guess you have shown us positive returns year after year.
You hopefully close the trade before you hit $20.
But I did run the strategy without STPs before 2022 and it still worked out. Some occasional losses, even worse than $20.00, but I always made the money back.
IIRC, a limit stop loss order can be placed for outside rth.
Will placing such an order with a very large buy limit (6000$ for example) act just like a regular market stop order, thus achieving stop order outside rth?
Or am I suggesting non sense here, and you could lose your entire account doing this?
I haven’t tried that one. But the limit STP might still fall through cracks if the market goes up quickly enough, not just above your STP but also above your limit. The only sure-fire way is to occasionally check during the irregular trading hours and pulling the plug if necessary.
1/27 was terrible but it’s business. I am chugging along and recovering some of my capital. My goal return is much higher too so slightly high risk but hopefully better reward
True. I’m in for the long run. And this particular loss was a few days of income (from all contracts, 1DTE, 0DTE, both puts and calls) so not catastrophic.
Thanks for all the options posts! I just read them all and had a couple questions:
Do you do anything differently on FOMC days?
Could you give us a bit of detail on how you managed the strategy on 1/24 through 1/27?
The day before the FOMC day, I still sell contracts as usual. On the FOMC day itself, there’s usually not much to be gained in the morning. Most of the time, I sell no 0DTE puts/calls before the FOMC decision. I wait until around the time of the decision to sell a few 0DTE.
I liquidated some of the contracts late on Sunday 1/26 and early in the morning of 1/27. There are no STPs during the off-hours. I had to manually liquidate the higher strike contracts at between $1.80 and $3.20. Turned out to be a false alarm, but better safe than sorry.
Do you find useful the gamma exposure (GEX) graphs when trading 0DTE?
I don’t track those.
Hi Karsten, you’ve mentioned 1dte is your bread and butter. Is this mainly because of higher premiums and the power of theta overnight reducing the premium when the maket doesnt drop? The reason I ask is while the premium is lower with 0dte, it seems to have much less risk from big intra day moves than overnight moves with 1dte (though I dont have the data to support this).
Is that the main trade off – higher premium, more theta impact vs lower premium but a little lower risk of big losses?
The PCR (premium capture rate) is higher with the 1DTE than 0DTE. So I like to do both: 1DTE up to the limit before I hit the exposure fee and then fill up the rest of my margin with 0DTE.
Hi Karsten,
Do you use any stop losses for the calls you sell or do you run those without a stop?
Yes, I use STPs for the calls every day.
Thanks for sharing! Perhaps I am missing something. Personally I really do not understand why low risk credit spreads cannot achieve the same return. I have been doing that with minimal efforts past 5 years (about ~9-10% a year on mostly SPX and SPY on top of my long term holdings – PM account and it’s NOT 0 -1 DTE). I love it because I really don’t do much. There is no risk of blow up (yes there are drawdowns but what aren’t anyways).
Everyday, check whenever I have time and do something if necessary. Even if I miss some days, it won’t be the end of the world.
Anyways, people have own strategy and do whatever works for them!!
10% p.a. is very impressive. What are the parameters of your strategy?
1: DTE?
2: Leverage, i.e., how many spreads per $1m of capital?
3: Delta of the long and short leg at inception?
Hi Karsten – thanks for sharing this very helpful and interesting overview, always something to learn.
I was interested in the 0DTE calls, as you mentioned expanding this in 2024. I think you mention targeting $0.10 premium, 1.4-1.5% median OTM, 0.009 median delta, ~1x IV:VIX. In Jan/Feb 2025, are you still able to find those premiums with attractive OTM and delta?
My recent experience is that at open, the best 0DTE call $0.10 is ~1% OTM, ~0.01 delta. This morning (2/10) SPX opened at ~6050, VIX at 16, and the best $0.10 was around ~6115. And the distance to stop loss execution could be as low as 30-40 points or 0.5% price movement.
Am I looking at this wrong, and that strike/premium is better than it looks? Or are we in a season of stronger downside market sensitivity (I’ve seen strong 1DTE and 0DTE put strike/premiums), and the calls are relatively weaker?
Thanks for any thoughts you have on this.
That’s the premium target I use. So far, this has worked well since 2023. It has a higher PCR than my 0DTE puts.
While the puts seem more similar, SPX call premium seems to deviate way more from SPY call premium for the most similar 0dte call from what I’ve noticed (it seems to get closer as you go a few more days out from expiration). Not majorly scientific I know but Ive compared them a few times over the last few weeks as I sell 0dte SPY calls but I want to change to SPX. I assume there is less demand on SPX for calls.
Interesting! In what direction is the deviation? Or does that differ, too?
Dividend dates might make a difference. Though that would be true on both put and call side.
For the most part, ‘normalized’ for OTM and delta and the notional value differences, SPY premium is often significantly higher closer to ATM for 0 and 1 dte (I’ve seen as much as 2x higher). The premiums get closer further OTM but there can still be a 20%+ difference. I saw one day where the difference was flipped but for the most part the above is the trend I see. Again, this is purely based on rough math probably 8 -10 times over the last 6 weeks so take it with a grain of salt.
That’s very odd, because there should be a no-arbitrage condition between the SPX and SPY. I will set up a watchlist and see if this is exploitable.
Of course, trading SPY options would be a hassle during tax season. Maybe that’s why you get a slightly higher premium. It wouldn’t explain 20%+, though.
Sounds good. I’d love to hear what you learn.
I checked the SPX vs. SPY options this morning – a wide range of strikes. For example: -0.01 Delta. Both contracts 4.26% OTM. Both contracts have a premium of 0.00006 times the value of the underlying. So, I cannot replicate that big premium difference for 0DTE puts.
Thanks for sharing all your data, Ern. For someone like me, who has recently retired at 54 and is starting to trade options to generate extra income, this is information is super valuable.
I have a couple of simple questions for you, if you don’t mind: 1) how many 1DTE and 0DTE put option contracts do you usually write a day? 2) do you vary the number of contracts depending on market conditions?
In a 2.3m portfolio I write about 14 1DTE and 7 0DTE puts. And 20-22 0DTE calls.
I don’t vary the number much. But if I see some very attractive premiums, I may increase the number.
For a total 42 options, the margin per option is about 2.3m/42($55k). Your brokerage margin requirement is low. Many brokerages ask for much higher margin per option. Your brokerage is very option-trading friendly.
In a portfolio margin account where you’re selling naked puts, selling calls requires very little additional margin (different under standard/Reg T margin accounts). Presumably this is because the likelihood of experiencing losses on both sides for 0DTE or 1DTE options is very small.
Correct. I answered before seeing this reply.
You misunderstood something. 21 are puts and 21 are calls. Of the 21 puts, only 14 are overnight, so that’s 164K of capital per short overnight put. That’s a lot more than the initial margin of around 60k.
Intra-day there’s $109k of capital per put. And $109k per call. Portfolio margin takes into account that the two risks are in exact opposite directions.
My brokerage is not more and not less trading friendly. It’s just its job.
ERN, Great article. Been waiting for it to come out for months.
I have a question: For 1DTE options, one of the reason you are making money is because IV is usually more than realized volatility (so + expected value). But for 0DTE options, when I look at VIX1D, at 9 AM, VIX1d has the lowest volatility and right before close it usually has the highest volatility. By shorting 0DTE options, you are selling at low IV and trade is ending at higher IV. To my inexperienced mind, that seems like a bad bet. But obviously you are making money. What am I missing?
Did you check this on one single day? What significance does that one observation have?
Either way, your observation “Implied vol in T vs. Implied Vol in T+1” will not negate my “Implied Vol vs. Realized Vol” observation.
Hi ERN, nice to see your blogs. I would like to ask you some questions. Below is my questions.
What is the approximate winning rate in a year for selling a 1DTE put option, and what is the maximum drawdown? For selling a 1DTE put option, should it be traded during the midday of the 1DTE trading day, at a fixed time before the market close, or based on one’s own judgment?
In 2024, I lost money on 1.7% of the contracts. I made 77.3% of the gross premium of contracts I sold.
In 2024, my worst drawdown from the puts was 0.26% of the portfolio.
Hello, thanks for your always good content.
The links you posted are behind paywall, but it is very easy to find them for free on the internet.
Curious to know who buys 1DTE and particularly 0DTE puts. Are your buyers just MM? Have you look into it?
Good question. Probably some institutional investors.
Do you use a website accounting or tracking software to track your returns and understand the statistics of your trades? A spreadsheet? Just curious how you keep track of your returns for option transactions? Thank you.
I use a spreadsheet to log my trades. I also read that sheet into Python to do some additional calculations and charts.
Thank you! Did you create your own spreadsheet or use an available template? Trying to figure out a system for myself.
I have my own spreadsheet. I track:
Trade Date
Expiration
Type (P/C)
Premium
Strike
SPX level at trade
Commission
Time
Close Date/time
Close price
Hi ERN, thank you very much for your blogs and I read a lot. May I ask you a question when selling a 1DTE put option, you will sell it at the market open time of the 1DTE, or noon of 1DTE, or near the market closing time, or should the selling time be chosen based on own judgment? Thanks
I sell the 1DTE slightly before and also after market close because I often need to wait until my margin comes back. For trading times, please refer to the chart from the post, reposted here:
thanks a lot.
ERN thanks for amazing content and podcasts. I am Bart of the Tradebusters group. Curious how Feb has been for you with these wild swings.
Feb was good. Some smaller needle-prick losses, but still a solid month. +0.36% from the options. Which is about the mean/median I target.
Hi Karsten, I noticed majority of your 1DTE put are $0.10 premium. But you do sell many 1DTE above 0.10 premium. At what situation you feel comfortable bumping up the premium? As higher premium means higher strike price and higher risk of execution. Thanks!
Sorry typo. My fat fingers :). Hi Karsten,
I corrected the typo. 🙂
I try to get more than $0.10 on average for 1DTE. Days like Friday (2/28) or today (3/3) will yield rich premium much larger than 0.10 for the 1DTE.
Thanks! The 1DTE OTM percentage is between 2% to 23%, quite large range. What parameters make you sell put at very high OTM percentage instead of lower OTM percentage for higher premiums?
Changes every day. Calm days = low, crazy days like 8/5/2024 = 20+%
How would I best go about learning this strategy. It seems that the strategy is scattered throughout the entire website? Or am I missing something? Thank you.
It’s in the options tab in the main menu. Or you can search for “options” in the search field.
Ern, absolutely love your content, exactly what I’ve been looking for.
I have a question about your 1DTE strategy and your capacity. To make my question simple I’ll assume you trade the same # of contracts every day. On any trading day, after you open the position that expires the next day you have double the number of contracts open than before you opened that position, because the contracts that you bought yesterday (and expire today) are still open. How do you deal with this overlap? You’ve mentioned having $110K in capital per contract. If you had $1.1M in capital does that mean you’d only trade 5 per day so that you never have more than 10 open? Or, do you trade 10 per day and have some other strategy to manage the risk during those hours where you have contracts open on both days?
I made money last year selling 3DTE credit put spreads every day, but don’t like having 4 separate highly correlated trades open at a time. I like that your strategy has less of this correlation.
Actually, after reading all of this more carefully I think I have my answer – you open the 1DTE position in the 15 minute window from 4:00-4:15 Eastern, since the options you bought yesterday expired at 4:00. Correct?
Yeah, correct. Please see my other comment. But note the other 1DTE I can already trade before the close.
At the open, trade some more 0DTE puts. Closer to the close, max out all the margin to the last dollar. After 4 PM NYSE time (1 PM my local time on teh West Coast) I fill up the remaining options to reach my target for 1DTE.
Don’t you prefer to max the margin utilization with 0dte calls & puts (which is reasonable as you use stp) and then sell all of the 1dte puts right after close?
I don’t typically max out the margin with 0DTE puts. I prefer to spread the 1DTE trades to half before the close and half after the close.
Thank you Karsten for this excellent update on your options trading outcomes!
If you were using a different brokerage and didn’t have to deal with the Interactive Brokers overnight exposure fee, would you consider doing away with the 0DTE puts and instead sell a correspondingly higher number of 1DTE puts (given the near perfect PCR for your 1DTE strategy)? Or, would you still limit the number of your 1DTE puts due to the potential risk of an overnight black swan event causing the market to open much lower the next trading day?
I might do more 1DTE and less 0DTE puts as the 1DTEs definitely have a better PCR.
But I wouldn’t go crazy either. I’m also afraid of some overnight black swan surprise.
For smaller account sizes what would you think of using your strategy with XSP rather than SPX? The .05 and .1 premium options are not as far OTM for XSP, but perhaps stop losses around $1-$2 would be hit with similar frequency?
I’ve read some complaints about bid/ask spreads and liquidity on XSP, but I haven’t had all that much trouble getting orders filled.
I’m not a U.S. taxpayer, so I’m not sure about the tax benefits of SPX/XSP over SPY that were mentioned here before.
However, if taxes are not a concern and your account size is suitable for XSP options but not SPX, then why not choose SPY?
SPY options are the most traded and liquid options in existence.
SPY is American Exercise where XSP is European. I used to trade SPY and got assigned a couple of times, which was super annoying. That was when I was writing spreads though that were only 1% – 2% OTM. I suppose when writing so far OTM and using stop losses assignment isn’t really a concern.
Also, yes XSP does have the tax advantage of being section 1256 instead of 100% short term capital gains from SPY.
Correct. Good point about the assignment hassle. I like the cash settlement of CBOE SPX options.
If the tax reporting and potential assignment isn’t a hassle for you, then you should run with the SPY options.
I would be afraid the commission would eat up most of the profits. But to dip your toes, why not?
Hi ERN, using Interactive Brokers have you ever activated the “Stock Yield Enhancement Program”? What do you think? risks?
Thanks
No. You’d lose the preferential treatment of the dividend income. All dividends will then be ordinary income.
Hi ERN, great post as usual with great comments/insights!
Just wondering what’s your approach currently with the high VIX? Approximately how far OTM are you targeting, given the relatively rich premiums compared to when the VIX was sitting below 15? How worried are you of episodes like the COVID crash?
Works like a charm right now. The vol built up relatively slowly. So, the 0DTE and 1DTE contracts went so far out of the money that even the 3% moves intraday, everything was safe.
Hi ERN,
Thank you for sharing such detailed insights into your options-trading strategy. As someone nearing FIRE, I’ve been exploring low-maintenance methods to enhance my ETF portfolio’s returns. Your approach is fascinating, though I wonder how it compares to a more passive leveraged strategy:
Long 130% S&P500 ETF
Short 30% SGOV/BIL (to fund the leverage via T-Bills’ yield)
Given the historical equity risk premium (~4-5% over T-Bills), could this 30% net exposure (130% long – 30% short) provide a durable edge, particularly in a falling-rate environment where the cost of carry decreases?
I recognize this might generate lower returns than your options strategy (~1-2% extra vs. your +4-5% annual alpha). But for passive investors, could even modest gains (e.g., 0.5-1% annually) meaningfully improve portfolio survivability by reducing sequence risk?
Any insights on this strategy and your views about would be invaluable. Thanks a lot
This will also have 1.3s the risk. Even 100% equities is not very safe for retirees. The SWR is under 3% in that case, likely lower for 1.3x equities. If equities keep rallying this is great but it can also spectacularly backfire.
Hi Ern. Scott Cederburg updated his paper (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4590406), arguing “The optimal strategy to invest throughout one’s entire life is 33% domestic stocks, 67% international stocks, 0% bonds, and 0% bills.” That includes the draw-down stage. Bonds only help address investor behavioral concerns. I know you addressed his original paper, curious if you have had a look at his revised work. The Canadians on The Rational Reminder Podcast stated, March 20 2025, “[bonds do not enhance returns over the long term … do not reduce volatility over the long term … the only reason to hold bonds is to mitigate investor behavioural concerns.. I am 100% equities…]”. I know your research, and excel worksheet, challenges such claims. Curious if any new thoughts with SC’s amended paper? Thanks very much.
The paper is a clown show for the 8 reasons I presented here. Changing the parameters will not fix that. If anything, lowering the domestic weight will do harm, because you’re again trying to overfit the experience in the small and insignificant countries. But for US-based investors, that’s the wrong direction.
This paper is beyond saving, unless they do some major overhaul to the methodology.
Thanks for the reply. Interesting to note how many people are engaged by if not convinced of Cederburg’s conclusions. Seems like it’s generating significant academic and industry interest. Today March 27 the Rational Reminder Cdns are interviewing him in light of his revisions. If the research generating so much buzz really is of such low quality it attests to how challenging the investment field is to navigate for not just lay people but professionals. I appreciate you taking the time to comment.
Yeah, the paper gets attention from all the “right” people. I’m not surprised.
Hi Ern,
I’ve thought of a strategy to buy VIX puts: when the VIX is at or above 30, start buying put options on the VIX with a strike price of 25 and an expiration of 2 months. This is based on the mean-reverting nature of the VIX, which suggests that after a period of panic, it may take several weeks to a couple of months for the VIX to decline below 25.
If the options are approaching one month to expiration, roll over to new 2-month put options with the same strike price of 25 and increase the number of contracts by 50% (i.e., to 1.5 times the current number). This is done with the expectation that the VIX will eventually mean-revert to 25 or below. When the VIX drops to 23, close the position.
If have the opportunity, could backtest this strategy to see how profitable it is?
You should always do the backtests yourself if you can. If not, you should pay somebody like spintwig to do it for you. Historical data on options is not cheap. A test like that should cost you a couple hundreds.
I see what you are trying to do here with this strategy, but bear in mind that you can never trade spot VIX, and that long-dated VIX options may not react meaningfully to a VIX spike. Also, spikes above 30 are not all that common.
I’m just proposing a strategy, not asking for a backtest. I just thought of it suddenly because the VIX has surged significantly in the past few days. Because predicting corporate operations and economic growth or recession is very difficult, but the mean reversion of the VIX is relatively certain, though the timing is uncertain.
Yes, excellent point. Also see my comment about the backwardation of the VIX term structure.
This will not be very profitable. If you buy very short-term VIX puts, the premium is high and the VIX may not drop fast enough. If you buy very long-dated VIX puts, note that the VIX term structure is in extreme backwardation. Example 4/4/2025:
VIX Spot 45.31
April 2025 Future: 32.50
June 2025 Future: 26.39
Dec 2025 Future: 22.47
So, the strikes for the long-dated puts would be way too low to make much money. Your 25 strike put would be In The Money in December: Very expensive to buy.
Thanks for your suggestion, i think you are right.
Hope everyone is staying safe out there – VIX is pretty wild morning of 4/4.
Sold 8.5% OTM puts at 4950 at close on 4/3 for $0.50, and manually bought to close at $2.75 at 10:45 EST after VIX spiked to 40+. Happy I did since they traded close to 15x stop loss ($7.50) within minutes. 2 delta options becoming 10 delta in <1 minute is eye-opening. Of course those puts are now back at 1.00 range now….
15-20% OTM puts for Mon 4/7 close are looking good. In these market conditions, it seems like you either have to pick a great VIX entry point somehow or carry a big margin of safety.
Yep the last couple of days have been crazy. I’ve been trying to do a version of ERNs strategy using XSP instead of SPX. I’ve been doing it for a month now and today was my first loss. I only lost half of what I’d made over the past month though, so I’m still feeling good. I had sold 1DTE XSP puts at 510 yesterday for $0.08, and bought to cover today at $1.35. It has traded as high as $3.97 today. This is not for the faint of heart!
The 4200(!) 1DTE put (17% OTM) for Mon expiration just traded from <$1.00 to $5.50 near market close. Incredible.
I'm not sure there's any risk/premium I'm comfortable carrying over this weekend (now watch the market open up on Mon..).
I sold this 4200 for 3.5$ 🙂
Unfortunately suffered a serious loss today.
Got the same strike. I hope the $3.50 will compensate for some of the loss! My puts all made money this week!
I noticed that too. I sold some of the 4200s for 1.75 at 12:52. Then for $3.30 at 12:59. The S&P only moved down by another 15 points during that time. Not a Delta effect, but almost purely Vega. Insane! This smells like a capitulation trade. I hope Monday will be more stable again.
Yeah, this is not the time to get too greedy or trying to prove the market got it wrong. Tread carefully now!
Do you mind sharing which brokerage you’re trading at? I’ve been paper trading this strategy with XSP on IBKR for a couple of months, with good success, but I’m having trouble finding a brokerage I can trade for real on with a <$100k account size.
He’s using IBKR as well
This was in reply to Dave, above. I’m aware ERN is using IBKR, but my request for options trading has been sitting pending for weeks now.
I’m using Fidelity
Thanks! I’ll give them a shot.
My early testing with Fidelity showed a substantial issue – margin associated with expiring short options positions does not get “released” until hours after 4 PM EST, maybe not until the evening.
I also believe Fidelity’s portfolio margin policies are more restrictive in general than IBKR’s. That is a good or bad thing depending on your point of view.
Fidelity has that issue. IB is better for us short-term traders.
Yes I do have the same issue MB noticed with margin not being released until the evening. It is the Intraday buying power that becomes the limiting factor for me. That said, I’m comfortable with the number of contracts I’m able to trade at Fidelity. I’m still a beginner at this and don’t want to over-leverage.
Interactive Brokers is better. My margin comes back within 30-60 seconds after the top of the hour at the NYSE market close. So, I usually have around 14 more minutes to trade.
Yep, thanks! 🙂
Interactive Brokers.
I had 4800 and below strikes for Friday 4/4/2025. They held up very well.
My Monday 4/7/2025 strike: 4200, or 17% Out of the Money.
Put premiums were incredible today. Be careful out there people.
Yeah, good advice! Don’t go too crazy!
I think with this new WH regime and its unpredictable path, we are in uncharted waters. My OO back tests are worthless the past 3 weeks or so. After a couple nasty losses, i changed course drastically and was able to end in the black for the month. I think the need to adjust to macro trends almost realtime is necessary given the nuances and whim of those at the reins. Even though the OTM credits were very tempting to hold over the weekend I would not be surprised for a double digit % drop at the open like back in ’87. Everything feels very risky at the moment.
The 10/19/1987 crash did not start with a double-digit % drop at the open. It was a more or less gradual decline during that day.
Unfortunately it was worse than that having lived through it, see section 2.2 for a play by play. https://www.federalreserve.gov/Pubs/feds/2007/200713/200713pap.pdf Will the same thing happen this monday, probably not, i expect the clearing houses to operate cleanly but it is that efficiency that could support a a strong decline to the 1st circuit breaker (7%).
According to the chart on page 6, there was no double-digit gap down at the open. That’s all I’m saying.
And we agree: a 1987-style crash is unlikely with better functioning “plumbing” today. I expect a testing of the bear market level: S&P 4915. I hope we don’t test the 7% breaker.
But even if we do, my 3800-4200 strikes for Monday should be OK.
Welp. That 6% increase in under 10 minutes today wiped out double all of my gains since I started a month ago. I sold a 0DTE call earlier today that was 5% OTM.
I think my biggest problem is how to deal with stop losses. I’ve been using “mental stops” rather than actual stops, and it had helped rather than hurt me so far. There were two times earlier this month I would have gotten stopped out but held on expecting the market to turn around, which it did, and the one loss I did take a few days ago was just barely more than my mental stop. Today though it moved so fast that there was no way for me to get out until it was 9X my mental stop.
The problem is I’m scared that actual stops will get unnecessarily triggered. I have a lot to learn – good thing I’ve started small.
I saw some asks today in the >$20000 range, because the order book was completely emptied. I would expect the broker not to execute a stop at those, but it also probably means some people got stopped at unreasonable levels due to low order book. Anyone know if this is true?
Maybe pick strikes that are at prominent numbers, ending in 00,25,50,75. They are usually liquid enough to fill all STPs.
Good idea. I would guess that having a relatively low stop market would be better, which makes sense if you’re going after low premiums (e.g. stops of ~$2.50 for low delta instead of $250 for higher delta are probably not going to run into this problem). But it’s making me consider putting a limit of 10x the stop trigger going forward, because if it exceeds that, the order book just doesn’t have enough entries.
Sounds like a plan! Good luck!
I used a Stop Loss. It got triggered and I lost a modest amount of money. But nothing serious. I would not trust myself deciding that second whether to stay in or cut my losses.
The stop really saved my today with the calls. Without them I would have lost years of gains in a single today.
I actually even made money with the calls today because after the stops triggered, I sold calls with a price around the trigger price, but by then they were already way far out of the money.
Yep, same here. The process works.
Been a pretty bumpy ride for me on this lately, so far nothing disastrous but whew certainly feels like I’m more attentive to this through the day than I had been used to.
Yeah, same for me. Not a good April so far, but still up if I combine March+April. Nothing to worry about.
Do you sell puts that expire on Monday on Friday market close or Sunday night?
Friday at the close.
Ern, I’m genuinely concerned that the meltup on Apr 9 may have blown up your 0DTE short calls, if you had any. That was probably the equivalent of a black swan on the right tail, which is typically not regarded as much.
It was a Black Swan but my STPs worked and got me out at a price of $2.50. Not a huge deal. They would have ended up more than $30 in the money, so the STP prevented a bigger loss.
The overnight put premium right now makes up for much of the loss right now.
So, I am sticking with the plan.
And what would have happened if the sudden increase had occurred outside trading hours?
Then the STP will get triggered and executed at much higher price than the originally set STP price at the opening of the market.
If you’re relying on stop losses and worried about overnight gaps blowing by your stop target, you might consider trading future options on ES (E-mini SP500) which trades 23 hours a day, and just not sell options over the weekend.
That would solve the problem. But recently, the overnight puts were so far OTM, it never became an issue.
It’s just those rare black swan events like deepseek release during the weekend in January that could cause substantial loss.
Correct. I cut my losses that Sunday night. But even that was a minor loss only.
How would you be able to trade at Sunday evening? Is the extended hour trade covers Sunday? Or it is only a few hours before and after regular trading time? I had STP at $6, but it got triggered at 12 right at the opening of the regular hour. The put has spiked before the regular opening time.
In my time zone, Pacific, trading in CBOE options starts again on Sunday at 5:15 PM. STPs don’t work during the off-hours. You’d have to close the trade manually.
The 0DTE calls are just that: I trade them at the market open. If the market rallies overnight before I sell them , then that’s irrelevant.
Amazing dude, now that’s robustness!
Thanks! I’ve been through worse. If my strategy worked in 2020, then 2025 should be OK as well.
Thanks so much for all of this info! It’s taken me several reads to get a general sense of what’s going on here. I have a question about trades. Would it be safe to say I should be able to get the lowest round strike (00,25,50,75) with a bid at my desired premium pretty consistently? I remember reading something about stale strikes where there’s no real trading going on.