OAP 053: The 1 Hour Per Month Options Strategy That Beat The S&P 500 by 24%

What if there was an options strategy that took just 1 hour per month to implement and actually beat the S&P 500 benchmark index both in performance and with less overall portfolio volatility? What if that one strategy was available to any trader, regardless of your account type or size?

You see, I believe you work too dang hard for your money and it doesn’t take a fancy financial planner or sophisticated mobile app to help you generate higher returns with less risk. All it takes is less than 1 hour per month. Yes, less time that it takes you to aimlessly scroll through your Facebook or Twitter feed.

Download The "Ultimate" Options Strategy Guide

Well, you can stop day dreaming because it’s a reality and in today’s podcast episode I’ll walk through the exact strategy that beat the market. No fluff. No smoke or mirrors; just cold hard facts. I’m sick and tired of people trying to tell me that options trading doesn’t work because today’s episode crushes every one of these unsubstantiated myths about trading.

Listen in and if you think this episode would be helpful to someone else, please help us spread the word here at Option Alph by sharing it with them. I mean how often can you share something online that actually helps someone make more money, with less risk? You just might become their new best friend!

Key Points from Today's Show:

  • Options give you a much better opportunity to generate excess return, alpha, above the market benchmark and do it with lower volatility in your account — lower swings in your account balance.
  • Options trading, when used appropriately and effectively, can enhance your portfolio returns by selling option premium, collecting the money into your account, reducing the cost of ownership and increasing your potential probability for success.

30-Delta BuyWrite Index — Simple Covered Call

  • Can use this simple covered call strategy, at the 30 delta, to outperform S&P 500. A covered call is getting into a position and stock and then selling a call option against that position — take in a credit in exchange for forfeiting potential upside beyond strike price.
  • Not only does this strategy generate more return for your portfolio, but your volatility or the annualized standardized deviation of this covered call option strategy is dramatically less than the S&P 500.
  • In every cyclical bull market that we've been in, the covered call strategy has outperformed during the bull market. Meaning, the stock market does not outperform this strategy, even when it is in a full blown bull market mode.
  • Even during market crashes, this covered call strategy outperforms the market. Because as volatility expands, it means you collect more premium, you get further away from the money with your deltas and options.
  • The key is that when you give up some upside potential, you increase your probability of success and you reduce the cost of ownership. Leverage the few things that you can control to outperform the market with less volatility and less variance in your account balance.

Covered Call Performance

Options Strategy: Covered Call Example

If the stock is trading at $100, you would buy the stock at $100 and now you have the ability to sell a covered call on it without any additional capital out of your account. Let's say the $105 strike price call option is trading for 50 cents. You could sell that $105 call option for 50 cents, or $50 in notional value, and you get to collect that money into your account.

Since selling the $105 all strike, that means you forfeit your right to make any money above $105. In exchange for doing that, you also collect a 50 cent premium, which reduces the cost of owning the stock by 50 cents. So now the cost of actually owning the stock was the $100 that you outlaid, less the 50 cent premium, which is $99.50.

When you reduce your upside potential, you get paid to do that and that reduces the cost of ownership of the stock, therefore increasing the probability that you make money. Now if the stock stays exactly where it is, at $100, you actually make money. You make $50 because the stock never went higher than $105, but it never went lower than your break-even price, which is $99.50.

Backtesting Research

  • In 1986, started with $100 invested for each strategy, the S&P 500 and the covered call strategy.
  • Then every month would sell an out of the money call option at the 30-Delta. So one time per month you would sell a 30-Delta call option against your position.
  • Tracked the performance of selling this covered call every single month since 1986, giving almost 30 years of data that show the performance of this simple covered call strategy. 
  • Over that time period they found that the S&P 500 have returned $1,599 for every $100 invested. The covered call, 30-Delta BuyWrite Index, returned $1,985 for every $100 invest.
  • This shows a 24% difference in the return of the benchmark index versus the covered call strategy.
  • The standard deviation or the variance and volatility in the S&P 500 was about 15.3% The BuyWrite Index, this covered call strategy, was 13.2%.

Option Strategy Annualized Returns

Option Strategy Volatility

The CBOE PutWrite Index — Simple Naked Put Option

  • For this strategy, they sold a put option on the S&P 500 and purchased treasury bills at the same time. Less capital required to do this, and basically creates almost the exact same payoff diagram as the BuyWrite Index.
  • Found that a single, naked put option on the market generated a total of $1,722 for every $100 invested compared to the $1,599 generated with the S&P 500.
  • Volatility in the account was again dramatically less than the S&P 500. The annual standard deviation with the naked put was 10.2% per year, which is less than both the S&P 500 (15.3%) and the covered call index (13.2%).
  • Even during the down periods, volatility in the options market increased exponentially. When volatility increases it means that selling the put option generates even more cash - sometimes 8 or 10 times more cash than it would in a bull market.
  • Source: CBOE

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Free Options Trading Courses:

  • Options Basics [20 Videos]: Whether you're a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.
  • Finding & Placing Trades [26 Videos]: Successful options trading is 100% dependent on your ability to find and enter trades that give you an "edge" in the market. This module helps teach you how to scan properly for and select the best strategies to execute smarter option trades each day.
  • Pricing & Volatility [12 Videos]: This module includes lessons on mastering implied volatility and premium pricing for specific strategies. We'll also look at IV relativeness and percentiles which help you determine the best strategy to use for each and every possible market setup.
  • Neutral Options Strategies [7 Videos]: The beauty of options is that you can trade the market within a neutral range either up or down. You'll learn to love sideways and range bound markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all.
  • Bullish Options Strategies [12 Videos]: Naturally everyone wants to make money when the market is heading higher. In this module, we'll show you how to create specific strategies that profit from up trending markets including low IV strategies like calendars, diagonals, covered calls and direction debit spreads.
  • Options Expiration & Assignment [11 Videos]: Our goal is to make sure you understand the logistics of how each process works and the parties involved. If you don’t feel confident in the expiration processes or have questions that you just can't seem to get answered, then this section will help you.
  • Portfolio Management [16 Videos]: When I say "portfolio management" some people automatically assume you need a Masters from MIT to understand the concept and strategies - that is NOT the case. And in this module, you'll see why managing your risk trading options is actually quite simple.
  • Trade Adjustments/Hedges [15 Videos]: In this popular module, we'll give you concrete examples of how you can hedge different options strategies to both reduce potential losses and give yourself an opportunity to profit if things turn around. Plus, we'll help you create an alert system to save time and make it more automatic.
  • Professional Trading [14 Videos]: Honestly, this module isn't just for professional traders; it's for anyone who wants to have eventually options replace some (or all) of their monthly income. Because the reality is that mindset is everything if you truly want to earn a living trading options.

PDF Guides & Checklists:

  • The Ultimate Options Strategy Guide [90 Pages]: Our most popular PDF workbook with detailed options strategy pages categorized by market direction. Read the whole guide in less than 15 mins and have it forever to reference.
  • Earnings Trading Guide [33 Pages]: The ultimate guide to earnings trades including the top things to look for when playing these one-day volatility events, expected move calculations, best strategies to use, adjustments, etc.
  • Implied Volatility (IV) Percentile Rank [3 Pages]: A cool, simple visual tool to help you understand how we should be trading based on the current IV rank of any particular stock and the best strategies for each blocked section of IV.
  • Guide to Trade Size & Allocation [8 Pages]: Helping you figure out exactly how to calculate new position size as well as how much you should be allocating to your each position based on your overall portfolio balance.
  • When to Exit/Manage Trades [7 Pages]: Broken down by option strategy we'll give you concrete guidelines on the best exit points and prices for each trade type to maximize your win rate and profits long-term.
  • 7-Step Trade Entry Checklist [10 Pages]: Our top 7 things you should be double-checking before you enter your next trading. This quick checklist will help keep you out of harms way by making sure you make smarter entries.

Real-Money, LIVE Trading:

  • IWM Iron Butterfly (Closing Trade): Exiting this IWM iron butterfly options trade gave us a $1,100+ profit after pinning the stock price one day before expiration at the peak of our spread.
  • CMG Iron Condor (Opening Trade): I just recorded my live trading platform (and real money account) as I walked through the process of entering a new iron condor trade in CMG stock. Inside you'll see me analyze, price and fill the trade in real-time.
  • APC Strangle (Closing Trade): Took about $150 out of this small APC strangle trade even after the stock moved completely against our short call strikes this month. But as always, implied volatility always trumps direction and because IV went down, the value of this spread dropped more-so than the impact of the directional move higher.
  • IYR Call Credit Spread (Adjusting Trade): This adjustment is good for 2 reasons. First, it reduces the overall risk in the trade if IYR continues to move higher. Second, it still leaves room for the stock to fall back down into our new profit window.
  • XHB Straddle (Closing Trade): We were able to bank a $120 profit early in the March expiration cycle for our XHB straddle with the stock trading right in the middle of our expected range.
  • AAPL Call Calendar (Opening Trade): Look behind the scenes as I use our new watchlist software to filter quickly and find this AAPL call calendar spread trade during overall low implied volatility in the market.
  • COF Strangle (Adjusting Trade): Here I recorded my live trading screen (and real money account) showing you the entire thought process we used to make an adjustment to my current short strangle in COF to reduce risk.
  • GDX Strangle (Opening Trade): With gold's high IV we are getting into a new strangle with a 70% chance of success and a decent credit for selling option premium.
  • IBB Iron Condor (Closing Trade): Today we're exiting an iron condor we traded in IBB for a $142 profit. Inside you'll see me analyze the exit price and fill the trade in real-time.

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About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.

  • Thanks for the comment Scott – actually we’ve already backtested this same strategy on the SPY since SPY is part of the project we’re currently working on and the numbers are nearly identical. Win rate was slightly higher with CBOE test but profit was slightly higher on the SPY version we rate for the same period. Also you could technical go synthetically long SPX each month and sell a covered call against the synthetic position so it is possible just a little more difficult to enter.

    • Also, the SPY pays a dividend, so there’s more alpha! Unless you were already using dividend-adjusted prices in your test…

  • Correct you sell the OTM call with a 70% probability of success each month. In this case they never touched the short call or managed it. So, if at expiration you were assigned, it assumed you bought back the index the next day and sold another covered call. Obviously closing it early with a profit might have been more profitable long-term rather than always hold until expiration.

  • Interesting thought. I assume the only thing you’d avoid in doing this was the ability to collect the dividends but the lower capital requirement would be a huge benefit for sure.

  • Yes the did consider commissions in the analysis.

  • Prashant Thakkar

    Hey Vuka, do you mean crating a synthetic long position? If so I believe you meant buying at the money call, sell put at the same strike and then sell OTM 30 delta call against it? Seems interesting!

  • Vuka

    Hey Prashant, That was what I was getting at, wasn’t sure of the mechanics behind it though.

    • Prashant Thakkar

      I think it will work well and exactly like being long SPY except losing the Dividend opportunity as Kirk pointed out and other thing which I can think of is cost associated with commissions on having 2 contracts opened and potentially closed every month. If assigned then the assignment fees. Longer term I think these will eat away some of the profits!

  • Hi Kirk!

    What about DTE? 24? 30? Trade Weeklies? Does the study mention anything about it?

    Thanks!

  • Yes you’re selling just the call option with a 70% chance of success.

  • Matthew Williams

    Does anyone know if they offer monthly mini contracts for SPY? I’m not seeing them on my broker platform.

    Thanks

  • I think they are fine and obviously win long-term but I think money could be better utilized with spreads.

  • You’d manage it just the same as a regular short call option and take profits on the call at 50% of the credit received.

  • Yes the stock could drop to zero technically. I think the “best” way to avoid this is just to use a long OTM call option on an expiration date far out. This limits downside risk and basically performs like long stock with less overall cost.

    • Mike

      thanks Kirk, i figured i will need to look at LEAPS to do this.

  • Wonderful to hear Trish! Yes just bought the market then sold covered calls with no additional capital added to the portfolio – you were always long the market.

  • No you didn’t buy the market but you could have used a substitute like SPY

  • Marc W.

    Hi Kirk, this podcast is very interesting. But I am still not quiet sure which stock / ETF we should sell the covered call. It’s BXMD? Because Think or Swim can’t find this symbol.

  • Yes for both. That’s why we don’t prefer covered calls because they still require a lot of capital to do. We like doing credit spreads instead.

  • Actually a little less favorable since the weekly contracts didn’t pay as much over time compared to monthly contracts.