As many of my readers know, my favorite option strategy is to sell out-of-the-money put credit spreads. The win rate is very high, because we can make money even if the stock remains stagnant or even falls a modest amount. Furthermore, limiting the margin requirement by selling put spreads instead of naked puts substantially increases the trade's rate of return.
Two academic studies - one from 2006 and a more recent one from 2012- - ack up my opinion regarding the superiority of the put-selling option strategy, concluding that while many option strategies lose money, put selling is one of the few option strategies that outperforms a buy-and-hold stock portfolio. The 2006 study states on pages 17 and 22-23 (emphasis added):
In agreement with previously presented results and prior literature, many option portfolios have risk-adjusted performance worse than the benchmark portfolio. However, some option portfolios exhibit risk-adjusted performance which exceeds that of the benchmark stock-only portfolio. When three-month options are used, written put portfolios for all moneyness levels (OTM, ATM, ITM) generate high returns and exhibit positive abnormal performance.
Table 2 on page 27 of the 2006 study ranks option strategies in descending order of return and selling puts with fixed three-month or six-month expirations is the most profitable strategy. At fixed 12-month or longer expirations, buying call options is the most profitable, which makes sense since long-term call options benefit from unlimited upside and slow time decay.
This study supports my strategy of selling puts with 2- to 5-month expirations and buying LEAP call options with one year or longer expirations. Below is an excerpted reproduction of the study's table 2 for options that have fixed three-month expirations during both 10-year and 22-year holding periods:
Annualized Return: 10-Year Holding Period
Annualized Return: 22-Year Holding Period
Sell ITM Puts
Sell ATM Puts
Sell OTM Puts
Sell ATM Covered Call
Sell OTM Covered Call
Buy ITM Call
Buy OTM Call
Buy ITM Put
Buy OTM Put
I'm not surprised that selling puts is the most profitable options strategy, but I'm a bit surprised that selling in-the-money puts is the best strategy. This is probably because the study does not include the horribly bearish 2008-09 stock market period. If the study were updated today, I bet selling out-of-the-money puts would be the number one options strategy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.