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:
Option Strategy | Annualized Return: 10-Year Holding Period | Annualized Return: 22-Year Holding Period |
Sell |
