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  1. JEI
    July 26, 2019 @ 5:29 pm

    Thanks for doing these. It’s eye opening.

    You were comparing your methodology here with ERN’s at the beginning of this series. I’ve read his series on the 4% withdrawal and optimal allocations, and he seems like a pretty smart guy…. and at least, someone who would he tracking his P/L results over time.

    The question I have is: how can someone have done this for years and allocated a significant portion of their portfolio to it if it’s just not that good?


    • bradf22
      July 27, 2019 @ 1:08 pm

      Big Ern is using leverage which spintwig test does not really add in here. If you add in leverage (which is easy to do with options) you can probably out-perform buy and hold but that comes at a higher risk. It would be interesting to see what would happen if you took all of spintwig’s test and scaled them all up to have the same volatility as buy and hold (doing an apples to apples comparison based on risk). My suspicion is that some of these strategies will start to outperform buy and hold at that point.


        July 27, 2019 @ 8:43 pm

        This strategy is indeed very leveraged – 5x in fact – and increases in leverage as the strategy underperforms SPY.

        ERN is using around 2.25x, down from his initial 3.25x, IIRC.

        Each position at the start of the study is ~5600 in margin requirement (SPY @ $140 in Jan 2007; margin is ~20% notional; 2800 each for put and call).

        Using the hold-till-expiration strategy there are on average 35 positions open at any given time which consumes roughly the entire 200k starting portfolio.

        You’re welcome JEI —

        The short puts he trades are the best performing options strategy of all I’ve backtested to date. It’s a profitable activity but it’s not as profitable as b/h SPY.

        I propose he would be better off purchasing SPY on margin in an amount comparable to his delta exposure and letting it ride for as long as he intends to trade options / leverage his portfolio.

        For example, if he’s writing 3-5 contracts of 5D puts on SPX, he could instead purchase 30-50 shares of SPY. It would be identical exposure to SPY without all the complexity, cost, and constant market checking of active trading. The returns would be higher, tax deferrable and potentially have a lower tax rate via LTCG, too.

        I stopped trading this month due to what the research suggests.


          July 27, 2019 @ 9:33 pm

          My theory is many of us are trading options due to TT’s research. Several option strategies generate positive returns, the “free” leverage makes the strategy attractive and there’s no other body of info available to measure performance.

          This is the only research I’m aware of that compares option strategies against b/h SPY.

          I’d be willing to wager Karsten might not have adopted put writing if this data was available before he got into the activity.

          Writing short puts, unless cash secured, is a leveraged long strategy. The reason it’s a sequence of returns hedge is because it’s making the withdrawal rate lower by way of leveraging the portfolio. That is, it’s artificially making the portfolio larger and the option profits are the returns on the leverage.

          Since we know SPY outperforms short puts, we can continue to mitigate sequence of returns by again making the portfolio artificially larger through leverage. However, instead of using options, buy more SPY. The outperformance of SPY vs short puts easily offsets margin interest [at IB rates] and much more.


          • bradf22
            July 28, 2019 @ 8:03 am

            Totally agree about the TT research and I am not defending the options strategies (as you know me by now 🙂

            But, I also don’t thin its fair to compare buy and hold returns to short option strategy returns without also accounting for the risk/volatility. It would be like me comparing a long stock position to a long bond position and saying stocks are better because they have higher returns. Its the “risk adjusted” returns that matter most. My guess is that BigErn is more comfortable with his risk-adjusted return profile vs. simple buy and hold as he has a bit of a downside cushion with any smaller down move in SPX.


              July 29, 2019 @ 1:41 pm

              Great point!

              He does have his collateral invested in mostly-bond-like instruments as opposed to SPY. The utility of options as a hedging tactic or tool to achieve a particular risk / return profile is not something I have covered or explored in detail.

              Karsten, would love to get your input on the topic!


        • Swibby
          October 27, 2021 @ 8:58 am

          Hey spintwig, dumb question just to confirm (I’m hearing disagreements from other’s who have read through this backtest). It appears this backtest is fully leveraged, but some people think it’s not.

          In this backtest were you using leverage or not? Typically in your methodology section you’ll list your max margin utilization target. What was the target for this test, 100%?

          I guess I’m just shocked to see that max leveraged 16 delta 45dte strangles underperform buy and hold because that’s in direct conflict with TT’s research which indicates basically the opposite. Do you know why their backtests would be so far off from yours?

          Note, I’m inclined to believe your backtests over TT’s because yours are much more transparent. Even so, it would be really helpful to better understand the discrepency between them.


            October 27, 2021 @ 10:10 am

            Hey Swibby – thanks for reaching out; not a dumb question at all!

            The short version goes: “I’m 99% sure this was 5x leveraged / 100% Reg-T margin utilization. However, this backtest was from when my methodology was version1 (before rebuilding all my tools from the ground up, increasing visibility into leverage and risk mechanics, saving all tool inputs and outputs for audit and Q/A purposes, etc.)” Hence, my certainty isn’t 100%. I may add this to the list of studies to refresh in 2022.

            Nevertheless, there are so many gaps / so much vagueness in the TT numbers and methodology that are presented that they could do almost anything they want under the hood. Let’s consider a few:

            1) Using “average annual return” as opposed to “total return” or “CAGR.” Total return requires a starting amount of capital and an ending amount of capital, as does CAGR. Average annual return can be based on “notional at risk,” “margin at risk,” or “portfolio starting size.” They don’t say which they use. Each way of calculating average annual return can yield materially different results.

            2) Building on number 1 above, we don’t have visibility into how position sizing is performed. For example, if the option strategy outperforms to the point where additional contracts can be opened, does position size increase or do the proceeds simply remain in the account without being risked. Conversely, if they start with a single position and the strategy underperforms to the point where a single contract can’t be opened, does that mean they inflate the starting capital and under allocate capital so that by the end of the backtest they “breakeven” to support a single position? They don’t say.

            3) Order entry timing: is a single position opened, held, then rolled to a new position at expiration/exit or is a new position opened daily? Virtually all of the TT research I’ve seen states the former. There is a tremendous amount of timing luck and path dependency in outcomes that use this methodology. Simply pick the starting date that best matches one’s narrative to generate the desired results. They didn’t say which start date they used in 2005 so the potential for cherrypicking the optimal path is material.

            4) In their methodology slide: “with allocation based on VIX” (3:54 in video) – Building on number 3 above, cherrypicking can be refined to find the path that yields the best outcome.

            5) There are other parts of the picture that are important but not mentioned such as max drawdown of each strategy, displaying P/L and related stats on each leg of the strangle so a trader can understand where the profits and risks are coming from, displaying the P/L of the NULL hypothesis (eg: larger position size when VIX is low), and more.

            The TLDR is that TT doesn’t provide enough information to really understand what they’re doing. It’s vague enough that no one can refute it. Some things that would boost their credibility would be 1) spin off the research division from the brokerage division and prohibit ownership and funding by an entity that profits from active trading, 2) share trade logs used in the study and 3) provide a methodology page that outlines exactly what they did, why, and how they calculated the metrics (


    • Richard Meadows
      March 29, 2022 @ 4:53 am

      One more Q – do you have the numbers on margin utilisation, like you do with the short put backtests? Also, if you do end up updating this as you mentioned in another comment (and double-checking the leverage) I’d definitely be interested. cheers!


        April 3, 2022 @ 9:07 pm

        I unfortunately don’t, but will once I refresh the study.


  2. Noobie
    May 3, 2020 @ 3:40 pm

    Hello, I’m just wondering the impact of high volatility on this topic? How would it play out if 1) We assume VIX to continue to remain high >30
    2) SPY slumps due to the multiple factors in play right now. In a best case scenario, with unlimited QE, I expect spy to float around the 270-290 range but beyond the elections, I expect a slump

    Would a buy and hold strategy still outperform short strangles in such conditions?

    As a follow up question, would using high IVR/percentile (easy enough to check using IB screener) or cm Williams VIX fix indicator to identify individual stocks ideal for short strangles, have the same outcome?

    Thank you for this wonderful resource!


  3. Noobie
    May 3, 2020 @ 3:43 pm

    Addendum: I’d also like to note that the constitution of SPY is not the same as it was in the past. I’m reminded of this fact when it was announced that Macy’s was being dropped after their slump.


  4. Noobie
    May 3, 2020 @ 4:01 pm

    Addendum 2: To summarize these rambling thoughts 😄, in times of high IV and an impending short-medium term bear run:
    1) Does the 10D, 25% profit take during a period of violent downswings seem to be an ideal strategy?
    2) Would you consider stop losses?

    Thank you!


      May 5, 2020 @ 8:29 pm

      Hi Noobie – thanks for stopping by. Happy to hear the resources are useful.

      For your first question, it depends what your goal(s) is(are). Is there a particular return profile you’re targeting? If you can share the specific goal(s) I can provide some guidance as for what would best achieve that goal given the research to date.

      Stop losses have historically underperformed as an exit strategy vs taking profits early so I would avoid them. This doesn’t speak to risk profile though. Neither my portfolio strategy nor personal risk tolerance support “unlimited risk” scenarios such as uncovered short calls. From a risk management perspective, a protective long call would be a more robust approach to managing risk than a stop loss. Adding a long call avoids the issue of the price gapping past a stop loss target.


  5. Noobie
    May 7, 2020 @ 1:11 am

    Thanks for taking the time to answer rookie questions! Your data is a goldmine for (many of) us noobies who’ve relied on anecdotal wisdom in the past.

    Having lost a significant portion of my capital to otm naked options, I’d say capital preservation followed by growth would be my goals.

    That being said, I’ve read that chasing number targets can introduce judgement errors. My objective in introducing stop limits was to eliminate my subjective interpretation of an ideal exit position. From your data, it seems like at least on the loss side, 100% seems to be an evidence based exit.

    My question is therefore restricted to the profit taking side. You’ve shown that a 25% (and 50% in some markets) exit on the upside is the ideal strategy. Assuming you’ve reached that 25% of credit goal on a short strangle, could I place a trailing stop limit order on a highly liquid choice such as SPY? I realize the risk of not executing with a stop limit order as well as that of theoretically getting a terrible value with a stop alone. You’ve also mentioned that a 21 day exit (regardless of what % you have at that time is a good policy…and I’m assuming the rising gamma beyond that plays a big role); so once again, assuming you’ve reached your 25% goal before 21 days; what would the data show is a potential “bonus” above 25% that you could theoretically gain were you to leave the trade to a trailing stop loss limit policy with that 25% being your limit?

    Thank you! And yes, for the time being, I’ve resorted to spreads.


      May 10, 2020 @ 1:16 am

      Sure thing! Happy to hear it’s helpful

      Genuine question: are you open to strategies that are not options based? I ask because an overwhelming majority of option strategies underperform buy/hold and even a blended 80/20 portfolio.

      If sticking with options I’d avoid short calls on SPY or any strategy on SPY that has a short call component – short vertical or calendar spreads, collars, strangles, etc. SPY short calls lose money over time and is, at a minimum, a P/L drag on the other half of a multi-leg strategy.

      That leaves short puts and long calls, both bullish strategies with essentially opposite risk profiles. One collects a little premium often for the risk of a big loss and the other costs premium day in and day out with the risk of not getting a leveraged payout. Neither are particularly appealing IMHO.

      Stop orders can work but they subject the portfolio to the negative side whipsaw whereas profit exits subject the portfolio to the positive side of whipsaw.

      My $.02 is avoid the stop orders and address downside risk at order entry with delta selection and/or with a protective long put to mitigate losses. If using spreads be mindful of the uncommon but potentially expensive Pin Risk.

      Hopefully this helps. I’m not sure I understand your last question though about bonuses.


  6. Jo
    February 1, 2021 @ 4:08 am


    I am a bit blown away by your research. It is excellent and comprehensive, so thanks for providing.

    It is also amazing how easy it is to be fooled by options. Thought experiments and logic don’t really seem to count for much. As an example, it has always seemed to me that if short puts work as a strategy (and your research seems to indicate they do), then short strangles/straddles should be better as the short call is negatively correlated with the short put, so even if the short call is net loss-making, the risk adjusted return should improve. But this test seems to show that this is not the case!

    In the comments above, you seem to be saying that essentially having done massive amounts of research, that we (retail traders at large) should probably avoid options, just go long the underlying with or without leverage? Is this the case? I should say that I have certainly lost more in options than I have made, over time, and I am getting to an age when I need to stop doing that. But it is hard to stop looking for that magic trade that will offer unrivaled secure returns.

    A further question – it seems to me, from various tests I have done, that it might be advantageous (in a risk adjusted sense) to use options to extract an income from a portfolio. So, selling covered calls on a portfolio. The call is profitable when the market falls, which prevents the investor selling shares when they have fallen. Any thoughts on this? I might be interested in a backtest, if you haven’t already done one.


      February 2, 2021 @ 10:45 pm

      Hi Jo – happy to hear the research is helpful!

      Yeah, mental models seem to be at odds with the data. Covered calls (half of the strangle/straddle trade) is a great example.

      When the underlying does well, yes, the long equity makes money and, yes, premium was received. The total return of the trade is: Long Underlying Profits + Premium Received – ITM loss on call, which is always a positive number. Because the total return is always positive, the losses are masked to the untrained eye.

      It’s not until the next covered call position is opened that the loss is “observed.” And it’s not an explicit observation – the cost is in buying the now-more-expensive shares of the underlying. For example, suppose XYZ had a covered call strike at $80 and the underlying went from $70 to $100. $10 is “made” but $20 is “lost” to the covered call. When 100 more shares need to be purchased to setup the next covered call trade, one has to find that additional $20/share to establish the long underlying position.

      Each underlying and option strategy has its own performance characteristics. What may work on one underlying may not work on another. More often than not, yes, total and risk adjusted returns of long underlying outperform most option strategies. I’ve seen exceptions based on underlying (short puts on EEM and exceptions based on custom signal(s) (private client research), but those are not the norm.

      There’s SPY 45DTE covered calls that may shed some light on the topic. There’s also a leveraged version, as well as 0DTE versions of each, that may be helpful too.


  7. Matt
    May 1, 2021 @ 3:30 pm

    Correct me if I am wrong, but this back test does not seem to factor in management. One advantage of short strangles is that if the underlying begins to test one of the sides, you can roll the untested side toward the tested side in order to receive more premium. This could lead to more gains overall.

    The next natural question is would this outperform buy and hold if you are allowed to move the legs of the strangles closer to each other, while maintaining the same entry and exit strategies?


      May 3, 2021 @ 6:55 pm

      Rolling the untested side would be susceptible to whipsaw and cuts both ways.

      Suppose we declare that the strategy shall roll the untested side when the position reaches 50% max profit. That “side” will be identical to the 50% max profit exit for the respective short put or call.

      A napkin math approach to identify total return would be to pull up any of the individual short put or short call studies and sum the total return values. Margin requirements will be a bit off but it’ll still be in the same ballpark.

      I’m not sure what you mean by “move the legs of the strangles closer to each other while maintaining the same entry and exit strategies.”


  8. Richard
    March 20, 2022 @ 10:24 pm

    Hi spintwig, thanks a lot for the comprehensive information. I am struggling to reconcile the total PL results against the PL per day – shouldn’t these be proportionately the same?

    For example: the 2.5D returns 9.05% for ‘75% or expiry’, which is worse than 10.31% for ‘Hold till expiry’. But the PL per day for this same two configurations is 10c and 8c, which is the opposite result. How can this be the case when we’re comparing the same management techniques? I know I’m missing something here but can’t quit put my finger on it. Many thanks, Richard


      March 23, 2022 @ 3:56 am

      Great question Richard!

      This has to do with using averages to measure performance. The hold till expiration strat experienced disproportionally greater and/or more severe losses than the 75% or Exp strat. These losses skewed the average lower. Meanwhile, the hold-till-expiration strat brought in more premium overall which is what contributed to the greater CAGR.

      Hope this helps!


      • Richard Meadows
        March 23, 2022 @ 4:01 am

        Ah of course! Makes sense, thanks for that.


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