Is There Money to be Made Investing in Options? A Historical Perspective

Today, we will review a paper titled Is There Money to be Made Investing in Options? A Historical Perspective. Doran et al*.

The authors use the S&P 100 and the S&P 500 as their benchmarks. The performance of these two benchmarks is nearly identical. Since we refer to the S&P 500 frequently in our blogs, we will do so here.

The paper is scholarly. Monday Morning Millionaire Program members who have the interest, the time and the advanced investing knowledge needed, would find it interesting.

The paper concludes “that including options in the portfolio most often results in underperformance relative to the benchmark portfolio.”

That has been my personal experience over many years. The Monday Morning Millionaire Program now recommends that members write (sell) options in their “fun” portfolio only. It should make up a small percentage of their market holdings but they might find some interesting mispricing which they might then use in their core portfolio.

Note that the paper mentions that underperformance occurs “often” and not “always”.

We have written about writing (selling) derivatives (options) earlier. It would be useful to review the blog. 

Here is another way some Monday Morning Millionaire Program members will find interesting.

  1. Take a meaningful amount of money, say$250,000 and park it in a money market fund such as the TD166 which recently yielded 2%.
  2. This allows you to write (sell) cash-secured puts on a selected security with a strike price 10% below the market price with an expiry date one year away. The Monday Morning Millionaire Program recommends that your security be an exchange-traded fund (ETF) which parallels the S&P 500. 
  3. The money you receive from writing these puts allows you to sell more cash-secured puts on the same security.
  4. Sit tight for a year.

The worst that could happen is that the market drops by more than 10%.  Your chosen ETF would be  put to you (you would be assigned, that is, you would have to buy the ETF at the strike price at which you sold it. ) You like your chosen index so that is fine but you would not be able to buy it at is current bargain price.

Most of the time, you would have earned a very nice return on your investment.

* Doran, James and Fodor, Andy, Is There Money to Be Made Investing in Options? A Historical Perspective (December 8, 2006). Available at SSRN: https://ssrn.com/abstract=873639 or http://dx.doi.org/10.2139/ssrn.873639

Please note that the Monday Morning Millionaire Program contains opinions only. It does not provide any investment advice or endorsements.

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Dr. Milan Somborac

The Monday Morning Millionaire Program supports do-it-yourself (DIY) investors which I have been for over 50 years. About my team and me

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