spx put and call selling 2002

Put and Call Selling

Simultaneously selling puts and calls is also very profitable.

Call/put Strike (% above (+) or below (-) OEX:	Average rate of return:	% profitable:	10th percentile:
-.5/-.5%	37.4%	88%	-0.6%
-5.6/+4.6%	37.9%	92%	1.0%

Note that average monthly return for -.5/-.5% straddle = 2.8% = 48% of the maximum (gross) profit of 5.7%.

Note that -5.6/+4.6% strangle maximum loss = -20.6%.

Put/call Strike (% above (+) or below (-) OEX:	Average rate of return:	% profitable:	10th percentile:
-.5/-.5%	37.4%	88%	-0.6%
-2.2/1.2	35.6%	88%	-0.5%
-3.1/2.9	33.1%	90%	0.0%
-4.8/3.7	29.4%	91%	0.4%
-5.6/4.6	26.2	92%	0.8%
-6.5/5.4	24.1	94%	0.8%
-7.3/7.1	19.3%	97%	1.4%
-8.2/8.8	16.5%	98	1.1
-9.0/8.8	15.3	98	1.0
-10.7/15.6	12.1	99.9*	0.7%

* This was profitable virtually every month except for the Crash of '87.

Note that the at-the-money combinations are most profitable, but that your percent profitability (88%) is lower. As you move further from at-the-money, your percent profitability approaches 100%, but your rate of return drops. The intriguing combination of a 10.7% out-of-the-money put sold and a 15.6% out-of-the-money call sold simultaneously leads to a 12.1% return, about equal to that of the stock market, but with only a sliver of the risk. Caveat: cash returns are included, which may be significantly lower in a low interest rate environment.

Leverage: Combining leverage plus out-of-the-money option sales leads to a nice trade-off between reliability and profitability:

Put/call Strike (% above (+) or below (-) OEX:	Average rate of return:	% profitable:	10th percentile:
-5.6/+4.6%	37.9%	92%	1.0%

In other words, with the OEX at about 570, if you had a $76,000 portfolio and simultaneously sold 2 calls 4.6% out-of-the-money and 2 puts 5.6% out-of-the-money, you could replicate this amount of leverage. This portfolio would throw off an expected $28,804 worth of income a year in collected premiums net of market losses. Note that the 10^th percentile is a very respectable 1.0%, meaning that 90% of the time your monthly return was 1.0% or higher.