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  1. okopnik
    July 28, 2019 @ 9:34 pm

    Thanks for the very interesting writeup, spintwig. I seem to have landed (mostly) on my feet – by luck, because it’s most certainly not by design – in my financial education journey. Started down the road with a trading educator, aborted the process a week or so down the road after smelling a rat, ran across tastyworks while blindly hunting for a way to learn these valuable skills despite the feeling that 99% of what’s offered is pure bunco, and have been trading (some might even call it “successful” – positive P&L overall, although I’m nowhere near the knowledge or income level that I want.) It’s been incredibly interesting and engaging so far, and I look forward to continuing to learn more about this world as time goes on.

    The main question I have for you, though, is this: if B&H is so profitable by comparison to options – and please correct me if I misunderstood something – then why are you involved in options trading at all?


      July 29, 2019 @ 3:39 pm

      You’re welcome! And thank you for the idea and interest that pushed me to move this up in the queue.

      Short answer: I stopped trading this month as a result of the research.

      I started trading late Q3 last year as a result of BigERN’s posts and subsequently TT materials. Like yourself I was a bit skeptical – I couldn’t put my finger on 1) how they could afford to perform and deliver all this research for free and 2) how any of these supposedly outperforming strategies haven’t been arbitraged away.

      On the other hand I was making a few bucks so I didn’t think to dig deeper.

      It wasn’t until doing several of these backtest studies and lots of homework on the retail broker business model that things started to finally make sense. I stopped trading and any leverage I intend to apply to my portfolio – none for the foreseeable future – will be in the form of long SPY on margin as opposed to options on SPY.


      • okopnik
        July 29, 2019 @ 10:50 pm

        > I stopped trading and any leverage I intend to apply to my portfolio – none for the foreseeable future – will be in the form of long SPY on margin as opposed to options on SPY.

        …wow. I seriously didn’t expect that. In a way, I’m really sorry to hear it; I have quite enjoyed watching you dig into the nitty-gritty of options, and integrated a fair amount of it into (or at least used it to confirm my own biases) my own trading. I’m genuinely going to miss your good thinking and your incisive analysis. 🙁

        SPY is definitely up this year… but we know that _now,_ with the usual perfect clarity. The future is a bit more cloudy. Are you absolutely sure that just being long SPY is the best answer? Not even long-dated puts for protection?

        Also, a question that’s a bit more pertinent to my own trading if you don’t mind: I think I’ve mentioned that, as a veteran, I trade commission-free at TradeStation. Would your decision have been any different if you were in my position?


          July 30, 2019 @ 1:08 am

          There’s a lot of interest in this space and demand for continued research. I intend to keep doing studies and related posts for the foreseeable future 🙂

          I’m absolutely certain. Let’s napkin math:

          The most lucrative non-ITM options strategy backtested thus far is the 75% or expiration 30D SPY short put. On a 100k portfolio it yielded ~65k over ~12.5 years. Not bad. If trading was free the P/L would be around 68k. I’m ignoring the fact that the strategy P&L is unrealistically high due to the strategy breaching margin requirements several times over the 12.5 years, particularly during market stress.

          Meanwhile, SPY yielded almost 119k, 75% more than the most lucrative and reproducible options strategy. For readers outside of the states the conversation ends there. For readers in the US there’s the advantage of being able to defer and/or pay lower rates on LTCG, further solidifying the argument toward buy-and-hold index.

          If it was close I could see how the uniqueness of individual scenarios, broker trade fees (or lack there of), margin rates, taxes, etc. could sway the decision one way or another. However, with a ~75% outperformance for buy-and-hold there’s nothing I can think of that can make the options strategy comparable.

          My decision would be the same. Free trades do make the low-risk strategies viable and revenue generating. However, even if trading for free, systematic options strategies don’t come close to buy-and-hold SPY.


            July 30, 2019 @ 1:18 am

            On an unrelated note, I’d like to learn more about your boat dwelling lifestyle. There are several moored and anchored across the street, not to mention many more parked at the various marinas, setup as a permanent water-based home. It was something I considered when I initially bought a house and again when I sold the house and downsized to a condo.

            What’s the maintenance schedule like and how do you handle extreme weather such as hurricanes (assuming you’re in a local where they exist)?


            • okopnik
              July 30, 2019 @ 10:59 am

              These days, I’m doing the RV thing – just can’t give up that mobile lifestyle. Might shift back to a boat, though; that’s always up for grabs. But I could write a treatise on both of those subjects… after 20 years aboard, I have a wealth of info (and opinions, mostly firm ones.) If you’d like, we can take that discussion off-line (just add ‘’ to my username).

              But as a pair of synopses:

              Maintenance: It Depends. Mostly on the skill sets that you have, or are willing to pick up. There are no plumbers, carpenters, mechanics, fiberglass repairmen, welders, or electricians out in the ocean (and adding the word “marine” to anything instantly triples its price), so the more you can learn, the better off you are. Costs and maintenance also go up asymptotically with boat length, so the fundamental decision is “how small of a boat can you be comfortable in?” Overall, if you start with a properly-designed, well-built boat in reasonable shape and in the 32-36′ range, you’ll have the absolute minimum of maintenance possible while having enough creature comforts (by my standards; it would be fairly sparse for most people.) After you *know* what you’ve got, and can make informed decisions for yourself, you can graduate to a larger boat if you want… but don’t saddle yourself with “making boat repairs in interesting places” (one of the definitions of cruising.) I have friends who spend half their time chasing parts from the Bahamas…

              Hurricanes: It Depends. 🙂 There’s a decision universe for where you’ll be at a given time of the year that involves personal comfort and wants/needs, sailing experience, weather, climate, wind direction/strength, alternate sailing routes, hurricane zones and seasons, and the time you can allocate to making the passages (which can depend on work and other commitments – or the other way around, depending on how you’ve arranged your life.) The size of anchors you carry on board also influences everything: with my 125-lb fisherman, backed by a 66-lb and a 72-lb CQR and a few other ancillary anchors, I’ve weathered a number of direct hits in Florida (I was off the boat for most of them.) Where you are also matters a lot: if I’m in, say, Salinas (PR), I don’t give a flying f* about hurricanes. If one is coming, I’ll simply sail over to Bahia de Jobos, run the boat up into one of the narrow but deep streams, run a line from each of my cleats or winches to 3-5 mangroves, and enjoy one of the greatest shows on earth. (There’s *NOTHING* in this world like watching a 155mph eyewall pass directly over you. I guarantee that it will leave a permanent imprint on your heart and soul.)

              Feel free to ping me for more, if you like. I owe you a beer or two. 🙂


            • Jordan
              July 31, 2020 @ 10:34 pm

              Hi Spintwig

              Thanks for your research. Great work.
              I have some comments below.

              > systematic options strategies don’t come close to buy-and-hold SPY.

              Is this still your opinion? I am struggling to understand this when compared with other material / research that has been published. I appreciate that the research is published by potentially biased actors given the retail broker model.
              I find your research particular interesting regarding the costs associated with systematic options trading.

              In the above comment chain, you compared “75% or expiration 30D SPY short put” against B&H SPY to justify outperformance of B&H. Is this a fair comparison given the differing risk profiles?

              > how any of these out-performing strategies haven’t been arbitraged away.

              By selling options, you are harvesting volatility risk premium which is a form of structual alpha that you cannot get through simple B&H of underlying. The volatility risk premium should not be arbitraged away as it is a genuine return for the risk of volatility expansion. It is similar to the insurance business model whereby premium is overpriced, but customers knowlingly pay for peace of mind.

              For this reason, systematic option strategies such as cash secured PutWrite should outperform B&H underlying long term (risk adjusted). The only instances where this would not be the case is if the volatility risk premium was negative over a prolonged duration. This would be catastrophic market failure – participants would need to be in prolonged state of denial about how negative things are, which I don’t think is possible given human tendancy to overreact (greed and fear).

              In saying all this, I agree with you that all systematic trading stategies have execution costs which cannot be ignored. Also, I agree with you that B&H has tax advantages which is critical and often ignored.

              It ties in to the good old passive vs active debate, which is unresolved. Can the excess risk adjusted return by an active strategy offset increased fees, yes – but most often not.


                August 2, 2020 @ 6:37 pm

                Hi Jordan,

                Since publishing this article, new research has suggested there are indeed select strategies that come close to buy/hold and it depends on the underlying. However, they are optimized to perfectly maximize leverage using hindsight bias and ignore tax drag. Outperformance has technically been possible in very specific, narrow scenarios. The only exception is EEM, where a cash-secured strategy outperforms, and even more so when leverage is applied.

                I’m open to comparing against other benchmarks. What do you suggest is a good benchmark for the “75% or expiration 30D SPY short put” strategy?

                The tradeoff of lower total return for lower volatility is fitting for those who have FIRE’d as it can help mitigate sequence of returns risk. See: I stick with the buy/hold approach and use some retail arbitrage opportunities and a small allocation to handpicked cumulative preferred shares to boost Sharpe ratio.


          • okopnik
            July 30, 2019 @ 10:17 am

            Thanks for that; I didn’t have your numbers, but simply drawing a trendline through SPY performance over the last 10 years (as I did when I started this process) stuck a little burr under me that’s been itching all this time. I thought I’d be able to beat it, at least after a year or two worth of learning curve, but… that’s been looking less and less likely as time goes on. I’m going to review your research and see if I can confirm it (it’s basic enough that I don’t see where it could be wrong, but I like to have my own numbers for financial decisions), and follow the outcome where it leads me. Most likely, I’ll sell some 30-40 delta naked puts for a bit and see if I can get into SPY at a decent cost basis, for the majority of my account. I should have been holding most of it in there anyway.

            The time and effort I’ve spent have not been a waste – the gain in perspective alone is worth it, and there will be times when these tools and the knowledge that goes with them _will_ come in handy – but I think I’m better suited to passive investment plus a little insurance for the bad times.


  2. Bryan
    October 2, 2020 @ 3:58 pm

    Hi – I’ve just come across your material and have yet to read and absorb. My Option Trading strategy has been based on the Wheel and my broad goal is to preserve capital and generate reasonably modest income.
    I have a fairly large portfolio and could buy and hold several lots of SPYs. One way of generating income from this would be to sell individual SPY shares and then top up with another assigned Short Put.
    I trade from Australia and its very early in the morning – my thinking may not be straight but I’d appreciate your thoughts.
    Thanks for your research I will read and absorb.


      October 5, 2020 @ 7:20 pm

      Hi Bryan – thanks for writing. I’m not familiar with your particular income needs, portfolio construction or risk concerns, but short-dated far-OTM short puts may help alleviate sequence of returns risk.

      I wrote a guest post over at BigERNs blog that dives into this strategy in more detail:

      Alternatively, a balanced portfolio of stocks and cash in high-yield savings accounts (in lieu of bonds since cash is outperforming for the time being) might be the best approach.


  3. Andy
    November 23, 2020 @ 4:30 am

    Hi Spintwig, thank you very much for your great work and giving away those backtests. These have really been eye-openers.

    What I have asked myself: if e.g. B&H systematically outperforms buying long calls – does that not necessarily imply that selling covered calls every day is a good idea? Am I missing something?


      November 24, 2020 @ 3:09 pm

      As far as SPY is concerned, systematically selling covered calls has generally been an unprofitable strategy.

      Sure, when shares get called away it means both the long position appreciated and all the premium was received. However, when one has to “buy back in” is where the masked loss of the short call expiring ITM becomes realized.

      If the covered call was written 2% OTM and SPY went up 3%, to sell subsequent covered calls you’ll need to repurchase 100 shares of SPY which will require additional funds to be deposited into the account.


  4. Andy
    November 25, 2020 @ 4:37 pm

    Would have been nice of you to name the source of that content.


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