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  1. Theta FAANG
    July 13, 2021 @ 9:44 am

    Very glad to see the follow up that was requested in the prior SPY backtest in January.

    Can you clarify if this is reinvesting the premium that is successfully collected?

    The primary attractiveness of this strategy is the accelerated compounding benefits of collecting multiple percentages of premium in very short time periods, for example ~1-4% in one week’s time. Many wealth generating charts make assumptions of 5% over one YEAR’s time, across 40-60 years, while this strategy does something similar in one week or one month with the proper selection of medium volatility or slightly higher premium option’s contracts. As such, despite drawdowns and attempting to learn the most probable time of exiting the trade before expiration, this should still have compounding growth (and greater portfolio volatility). Whereas the buy and hold strategy of the underlying SPY does not introduce new capital except potentially from the ETF’s management team reinvesting dividends.


    Theta FAANG


      July 18, 2021 @ 8:19 pm

      There is not enough premium received over the life of the backtest to purchase an additional 100 shares of SPY and open an additional option contract. Thus, reinvestment is not possible.

      At the same token, 69% of the strategy returns are attributable to the long SPY position. The rate of growth of SPY is materially faster than the rate of growth from the short options. This prevents any opportunity for option profits to be reinvested in a wheel-like strategy.

      1-4% per week is indeed doable for the short term depending on the underlying, but it is not sustainable. Extend such a strat over the span of several years and the eventual losses may generate a less-than-desirable CAGR.

      I’m not aware of ETFs that retain and reinvest dividends as opposed to distributing them to shareholders. Perhaps come CEFs, but none that come to mind off the top of my head.


  2. Ernest
    January 23, 2023 @ 4:38 pm


    thank you for this back test.

    It’s not clear to me however, were the covered calls sold ATM every time, or at the cost basis of acquired shares (a.k.a “hold the strike”)?

    I’ve seen a couple of back tests where “hold the strike” outperformed the underlying, so wanted to double check which case this back tests is referring to.

    Could you clarify? Thanks.


      January 23, 2023 @ 10:25 pm

      Hi Ernest – the short calls and short puts were sold at 5-delta, 10-delta, 16-delta, 30-delta, and 50-delta (ATM) for each backtest; the strike was not held in any of the 5 backtests.

      If you have a link to the hold-the-strike backtests, feel free to share. I’d like to take a look.


      • Ernest
        January 24, 2023 @ 3:41 am


        This is the original article
        there is a back test in it, but I’ve seen other say it’s “synthetic” or something and thus questionable results.

        There is another back test here from another person which confirms the total return being higher from hold the strike, but also shows drawdown being x2.5 times higher
        Which doesn’t make sense to me, the drawdown should be as high as the underlying (less actually because of premiums sold). So that’s questionable too.

        All in all, it’s sound theory imo. You earn extrinsic premium and any time there is intrinsic loss, you hold the strike and recoup that over time. Obviously want to make sure to do that on an underlying that will eventually come back up e.g. SPY.

        NOTE: In the article it talks about selling puts on the index e.g. SPX and holding the strike by selling DITM puts. This is equivalent to being assigned SPY shares and selling OTM calls at the cost basis.

        In theory the two are equivalent, in practice, from my understanding, wheeling SPY should actually better. The reasons:
        – the option chain doesn’t go infinitely high. So when you’re holding the strike deep deep ITM, eventually you can’t go any higher on SPX if index keeps falling. With SPY, you can simple hold the shares and wait for recovery.
        – The spreads will be large at the top of the option chain for SPX.
        – Lastly playing around on, it seems to me that the intrinsic eventually disappears higher up the SPX chain for DITM puts – you may even end up with net debit and lose money, instead of earn any extrinsic if underlying doesn’t move at those levels. With SPY calls, if you sell for credit, you sell for credit, no matter how high (and it seems to sell for credit higher).
        – With SPX you have frictional cost of paying for transactions (& spreads) when DITM – and you HAVE to keep selling to recover extrinsic, as you can’t buy SPX directly. With SPY you can simply hold the shares and sit back once the extrinsic is just too small (or option chain ran out). If you do sell anything, it will be always for net credit of sold calls.

        Would love to see your take on this 🙂

        If you back test this, there’s some variations to consider. The pure “hold the strike” will always keep on selling (whether puts on SPX or calls on SPY), even when the option chain “runs out”. At that point you can either follow the top of the option chain down (& back up). In reality (especially on shorter DTE) i think you’ll run out of any premium (no one buying the options) somewhere just half way up to the top of the option chain, at that point you can perhaps follow down (SPX) or even just simply hold the shares (SPY) until it recovers enough to sell anything at the cost basis.



          January 24, 2023 @ 9:07 pm


          Yes, deeper drawdowns are par for the course. Holding the strike of an assigned put, by definition, means the next put that’s sold is ITM. Selling an ITM put is the equivalent of being long the underlying and selling an ATM put.

          As the underlying continues to fall, the put becomes more and more leveraged. Each week the put is rolled, the leverage is reset.

          If one is willing and able to withstand the accelerating losses associated with leveraging up a continuously-falling position, they will come out ahead provided the underlying recovers (and there aren’t any structural limitations involving the leverage “running out” such as being at the end of an option chain).


          • Ernest
            January 29, 2023 @ 7:40 am


            I’m not sure we’re talking about the same thing or if we are, then one of us must be miss-understanding something – because i still don’t get where the deeper drawdowns suppose to come from?

            Let’s make sure we’re talking about the same “Hold the strike” (HTS) with some examples.

            – In all examples, we are always cash secured. Our leverage is no different to simply buy & holding the underlying.
            – we always start with 1000 account.
            – index starts at 1000 as well (for simplicity)

            Examples 1: option selling on SPX index example.

            As SPX is index and is cash settled, we can thus be simply dealing with puts all the time as per the Seeking Alpha article, because there are no shares to be assigned.

            Day 1:
            – SPX is at 1000
            – Our account is 1000

            We sell 1 ATM (strike 1000) CSP for 100 credit with 1DTE.

            Day 2:
            – SPX is at 700 (30% loss for SPX)
            – Our account is 800 (20% loss for our account)

            CSP expires ITM. SPX has fallen 300 points. So our net loss is 300 – 100 = 200 points. Our account lost only 20%.

            We hold the strike: We sell 1 ITM (strike 1000) CSP for 310 credit with 1DTE. (it’s 300 credit for intrinsic i.e. 1000 strike – 700 SPX & 10 extra credit for extrinsic premium on top)

            Day 3:
            – SPX is at 1000.01 (SPX recovered to day 1 value)
            – Our account is 1110 (our account recovered all SPX intrinsic losses and we keep our extrinsic premiums from day 1 & day 2)

            CSP expires OTM. Index has risen ~300 points. We sold CSP for 310 and it’s now worth 0. So our account goes up 800 + 310 = 1110

            This is of course identical to trading something that does have share assignment, e.g. SPY and substituting puts for calls like so (like the wheel):

            Examples 2: option selling on SPY example, where shares exist that can be assigned.

            As SPY has shares and is cash/shares settled, we thus deal with puts till we get assigned and then sell covered calls. Just like the wheel, expect this time we will be holding the strike with our calls.

            Day 1:
            – SPY is at 1000
            – Our account is 1000

            We sell 1 ATM (strike 1000) CSP for 100 credit with 1DTE.

            Day 2:
            – SPY is at 700 (30% loss for SPX)
            – Our account is 800 (20% loss for our account)

            CSP expires ITM. SPX has fallen 300 points. So our net loss is 300 – 100 = 200 points. Our account lost only 20%.
            We are assigned shares, so now our account holds 700 worth of SPY shares.

            We hold the strike: We sell 1 OTM (strike 1000) CC for 10 credit with 1DTE.

            Day 3:
            – SPY is at 1000.01 (SPY recovered to day 1 value)
            – Our account is 1110 (our account recovered all SPY intrinsic losses and we keep our extrinsic premiums from day 1 & day 2)

            CC expires ITM and our shares are called away. Index has risen ~300 points. We sold CC for 10 and it’s now worth ~0. So our account goes up 700 + 300 + 100 + 10 = 1110

            Now, assuming you’re not over-leverage (and I don’t see the Seeking Alpha article promoting that) and always CSP like in my example above, I don’t see how the HTS strategy has bigger drawdown than the underlying?? In fact it’s always less because it is in-fact equal to the underlying minus the cushioned by the premiums of puts you sold initially.

            Please let me know because I’ve read and re-read the article and the HTS described there is the same as HTS i described here. In which case I don’t see where the extra drawdown is suppose to come from??

            Regarding some things you’ve mentioned:
            “Selling an ITM put is the equivalent of being long the underlying and selling an ATM put.”
            I don’t see how that’s correct. Selling ITM put is equivalent to being long the underling and selling an OTM call. The premium is much reduced and you have more beta risk.

            “If one is willing and able to withstand the accelerating losses associated with leveraging up a continuously-falling position”
            There’s no continuously leveraging up, I believe you must have misunderstanding.
            Am I correct to say here that you were thinking along the lines of “when put is ITM and I get assigned shares, I sell another put ITM”? that’s not the case, like in my example, when you’re assigned shares, you either sell OTM calls at the strike that you need to hold OR if you wish you can sell out the shares and only then sell another put that’s ITM and at the strike you hold. but at no point you’re leverage is higher than simply holding the underlying.

            So if that was the same misunderstanding the other backtest with 80% drawdown, if he sold more puts while still keeping the shares, then i can see where that came from – but that is NOT the HTS described in the Seeking Alpha article.


              February 14, 2023 @ 12:32 pm

              Yes, sorry, that was a typo. I meant to say selling a call.

              Example 1, day 3: holding the strike is a leveraged play. If the strike is 1000, the account needs to have 1000 in value to be cash secured. In the example the portfolio is 800, which is a 1.25x leverage on a 1000 strike (1000/800). The account only recovers because leverage was used.

              Whether the loss is realized through settled options or via assigned shares with a basis above acquisition price, makes no difference.

              Modifying example 1 day 3, suppose the underlying fell another 100 pts. Since the leverage is 1.25x, the drawdown is greater than not holding the strike. If the underlying falls for 8 straight days (not that uncommon), then the leverage continues growing and causing deeper drawdowns until a reversal happens.


              • Ernest
                February 14, 2023 @ 1:15 pm

                Hey spintwig, thanks for the taking the time to read my blob of text, but
                with all due respect I still don’t think you follow what I was trying to say or what hold the strike means.

                There is no leverage here.

                “If the strike is 1000, the account needs to have 1000 in value to be cash secured.”

                No, the account needs to hold what ever the index is at in value to be cash secured. So if index is at 800, all i need is 800 cash, doesn’t matter if i sell a put at 1000 or 100000, my loss is same 800 no matter what, ergo no leverage.

                I still think you must be thinking about something else?

                Lets run through it again.

                If we have e.g. SPX, cash settled index. This is what holding strike means, nothing more, nothing less:

                Day 0: i have 1k cash in account. lets say SPX value is 1k as well.

                Day 1: sell one ATM (index strike 1k) cash secure put, the most i can loose is 100% of my cash and that’s if the index falls 100%.

                Day 2: the index falls 50% to 0.5k value. ignoring the extrinsic for simplicity, we lost 50% of our cash. (end of the day SPX is settled, i have no options in my account, nothing else but pure cash of 0.5k).

                Day 3: we hold the strike. means sell one DITM put at index strike 1k, while the index value recall is 0.5k and our cash in account is also 0.5k. so we are totally cash secured! The total cash in our account is 1k, which is 0.5k we had + 0.5k we got from selling the DITM put. If the index drops another 50%, it goes to 0.25k and our cash goes to 0.25k. We dont loose more than the index. If the index rises back to 1k, we gain all the value back to 1k, we follow the index. We follow the index on the up and on the down 1:1.

                There’s just no leverage here, at all! I don’t understand where the people get this confusion from?

                Let’s make this even simpler, before any movement of the index at all, just.

                Day 1: I have 1k cash in my account. Index is at 1k. I sell one cash secured DITM put on the index at strike 2k.

                Am leveraged?

                No because the most i can loose is 1:1 what the index looses. A DITM put is synthetically equivalent to simply holding the stock. And that’s exactly what holding the strike replicates. You earn extrinsic if the index doesn’t move and if index moves agains you, you hold the strike and wait for index to recover, gaining back the beta value.

                The long term performance of this is no worse than just holding the underlying.

                Hope make sense now? We really love to see back test of this.


                  February 14, 2023 @ 1:40 pm

                  If you’re holding a short put and have an account value less than the strike of the put * 100, the account / position is leveraged.

                  A short SPX put struck at 4,200 has a notional value of 420,000. For that position to be cash secured, there needs to be 420k in the account. It doesn’t matter what the underlying price is.

                  Example: suppose SPY is at 410 and you sell an ITM put at 420 because you’re holding the strike from a previous series of trades. Now let’s say SPY closes at 410 on the expiration date of the option. The position is ITM so you’ll need 42,000 in cash for the position to settle (100 shares of SPY at 420/share). If you have less than 42,000, the account is leveraged and you’re on margin.


                  • Ernest
                    February 14, 2023 @ 2:39 pm

                    Ok lets use your examples then.

                    SPY is at 410 and you also have 41000 cash. You sell ITM put at 420 so the cash in your account is now 42000: you had 41000 and you got paid ~1000 for selling a put at 420 (all intrinsic value pretty much).

                    So yes, you will need 42000 cash at expiration for the settlement and that’s EXACTLY what you have in your account.

                    So again, where’s the leverage coming from?

                    You’re always cash secured – always.

                    Let’s follow on from that trade then, by expiry SPY falls to 200.
                    So now the cash in your account is 20000.
                    You hold the strike and sell one put 420, the cash in your account is 42000: 20000 own cash + 24000 from selling the put.

                    If the index drops by 100 at expiry, you will loose 100 at expiry, if index gains 100 expiry you will gain 100. It’s 1:1. Where’s the leverage?

                    There’s no margin here. All cash secured.


                      February 14, 2023 @ 3:05 pm

                      The leverage is coming from your broker to open the short ITM put that doesn’t have enough cash to secure it.

                      SPY is 410

                      Cash is 41,000, position is 0, NLV = 41,000, marginable cash is 41,000.

                      Open -1 SPY 420 P for 10.10 in premium (1,010 USD).

                      Step 1: Broker fronts you exposure to 42,000
                      Step 2: Account has 41,000 in cash to secure the position
                      Step 3: The difference, 1,000, is borrowed money from the broker on margin, collateralized by the cash position.
                      Step 4: You receive 1,010 in premium (float) on the open position.

                      Cash is 42,010, position is -1,010, NLV = 41,000, marginable cash is still 41,000 since no realized PnL occurred yet. Leverage = 42000 (notional exposure) / 41000 (NLV) = 1.024x.

                      The premium received from a short option position isn’t counted as collateral for the initial margin. The broker may offer interest on premium / float once the position is open, but it won’t count toward initial margin. It may, however, count toward maintenance margin requirement depending on the broker’s margin rules.

                      If position expires with SPY at 410 and you sell the positions immediately, then cash is $10 + 100 SPY shares purchased at 420 but worth 410 (eg: loss of 1,000). This becomes 41000 from sale of SPY shares and $10 kept from premium.

  3. Ernest
    February 14, 2023 @ 5:04 pm

    I still don’t see where the problem is with hold the strike?

    Could we agree to some base facts:
    Selling an ITM put is the equivalent of being long the underlying, at least during drawdown (and ignoring extrinsic). Agree?

    If so that means your drawdowns will always be identical to simply holding the underlying. That’s what equivalent means.

    This is what I see on Interactive Brokers in terms of margin as of today for SPX with spot price 4136:

    30 DTE ATM strike 4135 put has max loss of ~400k and needs ~30k initial & ~30k maintenance margin. (max return ~8k)

    30 DTE DITM strike 8200 put has max loss of ~400k and needs ~30k initial & ~30k maintenance margin. (max return ~400k)

    As you see, they are identical in terms of max loss and margin requirements. Sure one has double the notional, but it’s ACTUAL exposure that matters, which is 400k – i.e. where the index is at. If I have 400k cash in my account, then selling either the ATM or DITM, my drawdowns will be the same either way. I’m no more leverage selling ATM than DITM. A 100k index loss for ATM will be the same 100k loss for DITM, at expiration the account will be down the same 100k in either case.

    You’re not borrowing anything from the broker at any point.

    If option chain went to infinity, you could sell a DITM put at 100,000,000 and it wouldn’t matter, you max loss is still 400k and margin req is still 30k if you have 400k cash in account. If the index goes down 100k you still loose 100k.

    By your leverage calculation, my leverage is: 100,000,000 (notional exposure) / 400,000 (NLV) = 250
    so um… ok what is that “leverage” suppose to mean then?

    Because a 100k loss in index is still a 100k loss for my account, no more no less. It’s 1:1 or in other words “no leverage”.


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