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Options Strategies: What Worked for Me

It is often difficult to determine whether a given options strategy generates better returns than simply buying or selling the shares involved. Long term studies on systematic applications of the covered call strategy have been interesting, suggesting that there may be a slight advantage over buy and hold. For an individual investor, trading a small volume based on judgment rather than applying some system, determining whether options strategies have improved portfolio performance is necessarily subjective. Nevertheless, I recently made a review of my trading since 1/1/2007 and thought I would share the results, not so much as a matter of research findings but more as a way of talking shop.

Methodology – the first step was to develop a data base starting with my open positions at cost as of 12/31/06, then adding all transactions through 5/31/2009, with the ending open positions valued at market. I use TradeLog, a capable piece of software that is designed to handle options and wash sales for tax purposes. The program downloads transactions from my brokerage accounts and assigns a self-consistent naming convention to the options, which starts with the stock symbol. Loading the data into a spreadsheet, and assigning each transaction a strategy and a sector, I can sort, subtotal, and analyze the rate of return. Commissions are included in the computations.

Assigning the strategies, I used what I started with when I opened the position, except when I had made a definite change of strategy, or closed the position and resumed it later with a different strategy. For example, I lumped everything I did with homebuilders under the covered combination strategy, because during the time in question I consistently planned to sell both puts and calls when premiums were attractive, although at times I had no open options and simply traded the shares. I did not open any positions specifically to do covered calls, so there are no results for the strategy, although I sold calls against my shares from time to time.

Bad decisions – a few of the trades were really bad decisions – I left them in. I played with analyzing things on the basis of “if you don't count that one bad case, the strategy worked well,” but in the final analysis options can magnify your errors and that fact has got to be accounted for.

Results by Strategy – here is a table showing the strategies I assigned, the rate of return, and the percentage of my portfolio.



Annualized Rate of Return (1/1/07-5/31/09)

% of Portfolio

Long shares



Short shares



Covered Combinations



Long in the money Calls



Long Diagonal Call Spreads



Long Vertical Call Spreads



Portfolio hedging by Index Puts



Long out of the money Calls



Selling Naked Puts



Reverse collar or fence, I have heard it called a bullish reversal



Total Portfolio



S&P 500 from 12/31/06 to 6/2/09



Click to enlarge


  • covered combinations (long shares, short straddles or strangles) outperformed, somewhat surprising in my case because it included a lot of homebuilders, not a class that did well during the period. Logically, the strategy is attractive, under the theory that a stock can't go both directions at once and you are being paid to buy low and sell high, which is exactly what you want to do anyway. Volatility was elevated during much a the time, making the premiums attractive. I would guess that anyone who used this strategy and avoided the most troublesome sectors did well. Paul Price here on Seeking Alpha has recommended a great many of these positions.

  • Long in the money calls did well, surprising because the leverage involved should make it under-perform in a down market. I used mostly LEAPs, so the time to expiration and increase in premium due to volatility helped me exit bad positions with some salvage. The better positions I rolled down, selling time premium when volatility was high and lowering my break-even. This strategy did very well from 2004-2006 and stood up better than I would have thought during the meltdown.

  • Hedging with puts helped me a lot. I accumulated distant expiration S&P 100 (OEX) puts, out of the money, while the market was high and volatility was low. The intention was to protect the long in the money calls, which I expected to under-perform in a down market. I sold the puts way early, January 08: so sad, otherwise I would have escaped the collapse in pretty good condition.

  • Long vertical call spreads and diagonal call spreads should probably be lumped with the long in the money calls: they all rely on using calls as a substitute for owning the shares. Considering the group of them together with the OEX puts used to hedge them, they out-performed the market.

  • Selling naked puts – I don't want to talk about it...this is something I did with impunity during times of turmoil from 2004-2006, but which wreaked havoc during the big meltdown. Curiously, selling puts as part of the covered combo or reverse collar did me no lasting harm.

  • Long out of the money calls is not something I do much. It's like buying lottery tickets, so I try to restrict it to situations where I think I know the winning number.

  • Reverse collar or fence – buying out of the money calls and funding it by selling out of the money puts. This worked well the few times I used it. Probably it should be grouped with out of the money calls: they both rely on the idea that options premiums don't properly reflect the upside on beaten down or volatile stocks.

  • Long shares, at a little less than half of the portfolio, underperformed the portfolio as a whole, suggesting that options helped performance.

Conclusions – options are fascinating and offer the attraction of leverage and the potential to change the risk/reward profile of a situation. Frequent trading exposes the investor/speculator to high commissions and slippage on the bid/ask spread. Enjoying options as much as I do, I have often wondered if overall they did me any good, or if I was enriching my broker at my own expense.

Not specifically analyzed but looking at it this was a period of time where risking a lot to gain a little was punished: similarly, risking a little to gain a lot was often rewarded.

To answer my own question, options increased my profits when I had an accurate understanding of the underlying stock in the context of existing market conditions. Where a conscious effort was made to use options to reduce or manage risk, benefits followed. There were cases where the stock made a round trip, or worse, but I made a profit. At times large returns were extracted from low risk propositions. The benefits outweighed the costs.

Where I didn't understand the stock, or neglected risk management, options amplified the results of mistakes, with painful consequences. So options are good tools, effective, but need to be used carefully, with strategies that are appropriate to the underlying situation.

Disclosure – I own and use the software mentioned, and have no other relationship with the vendor.