Suppose one wants to invest in company X, whose stock is selling for, say, $100/share. What are the differences in profit potential between buying 100 shares and repeatedly selling a naked put at whatever the current price is?

In more detail:

Suppose the stock goes up. Then one lets the put expire (or buys it back) and sells another one. If the stock has weekly options it seems likely that selling puts will make far more money than holding the stock. The repeated put premium will almost always outpace the rate at which the stock rises. You might miss big jumps, but I suspect you will make up for it by the week-by-week profit.

Suppose the stock goes down. One should then buy the put back and sell another one at a lower price for a longer price period. For example, suppose the stock declines by to $95. One could very likely sell a put at, say $97 for a somewhat longer period that would cover the cost of buying back the original put. If the stock continues to go down, one would do it again, ... and again. Eventually one might find oneself short a rather long term put. (Of course if one just owed the stock one would be stuck with the loss.)

I suspect that there will be enough variation in the stock price that one can remain fairly even and not committed to too long a period. Eventually the stock will go up. One can then reverse course, buy back the longer term put and sell a shorter term one, perhaps at a higher price.

My question is whether anyone knows of any studies that have been done of this sort of strategy.

I would think that one would want to try this strategy primarily on stocks that one would otherwise want to hold as a long term investment.


4 Answers 4


Yes, of course there have been studies on this. This is no more than a question about whether the options are properly priced. (If properly priced, then your strategy will not make money on average before transaction costs and will lose once transaction costs are included. If you could make money using your strategy, on average, then the market should - and generally will - make an adjustment in the option price to compensate.)

The most famous studies on this were conducted by Black and Scholes and then by Merton. This work won the Nobel Prize in 1995. Although the Black-Scholes (or Black-Scholes-Merton) equation is so well known now that people may forget it, they didn't just sit down one day and write and equation that they thought was cool. They actually derived the equation based on market factors.

Beyond this "pioneering" work, you've got at least two branches of study. Academics have continued to study option pricing, including but not limited to revisions to the original Black-Scholes model, and hedge funds / large trading house have "quants" looking at this stuff all of the time. The former, you could look up if you want. The latter will never see the light of day because it's proprietary.

If you want specific references, I think that any textbook for a quantitative finance class would be a fine place to start. I wouldn't be surprised if you actually find your strategy as part of a homework problem.

This is not to say, by the way, that I don't think you can make money with this type of trade, but your strategy will need to include more information than you've outlined here. Choosing which information and getting your hands on it in a timely manner will be the key.


I sell a put for a strike price at the market. The stock rises $50 over the next couple months. I've gotten the premium, but lost the rest of the potential gain, yet had the downside risk the whole time.

There's no free lunch.

Edit - you can use a BS (Black-Scholes) calculator to create your own back testing. The calculator shows a 1% interest rate, 2% yield, and 15% volatility produce a put price almost identical to the pricing I see for S&P (the SPY ETF, specifically) $205 put. No answer here, including mine, gave any reference to a study. If one exists, it will almost certainly be on an index, not individual stocks. Note that Jack's answer referencing PUTX does exactly that. The SPY ETF and it put options. My suggestion here would, in theory, let you analyze this strategy for individual stock options as well.

For SPY - With SPY at 204.40, this is the Put you'd look at -

enter image description here

12 times the premium is $33.36 or 16% the current price. The next part of the exercise is to see how the monthly ups and downs impact this return. A drop to $201 wipes out that month's premium.

It happens that it now March 18th, and despite a bad start to the year, we are at break-even YTD. A peek back shows

  • Dec 15 - $205.03
  • Jan 15 - $187.81
  • Feb 12 - $186.63
  • Mar 18 - $204 - current price

In Dec you picked up $2.87 premium, (1.4% the current price then) but in Jan, it closed for a loss of $12. Ouch. Now, if you started in January, you'd have picked up 2 month's premiums and today or Monday sell the 3rd. You'd have 2.8% profit so far, vs the S&P break even.

Last, for now, when selling a naked put, you have to put up margin money. Not sure how much, but I use percent of the value of underlying stock to calculate returns. That choice is debatable, it just keeps percents clean. Else you put up no money and have infinite return.

  • That's why I asked if there were any studies.
    – RussAbbott
    Mar 17, 2016 at 17:07
  • Thanks for the extended example! Are you assuming an option price of $2.78 each month? Then the loss for Dec is 2.78 - (205.03 - 187.81) = 14.26. The profit for Jan is 2.78 - (187.81 - 186.63) = 1.60. The profit for Feb is 2.87. So clearly this would be a net loss for the 3 months. But my thought was that on Jan 15 instead of covering the Dec option, you sell a Jan ITM option that covers the cost to buy back the Dec option. Perhaps the 203 would do it. Then in February you do the same thing and sell, say, the 201. In March it would expire worthless, and you would have your initial 2.78 profit.
    – RussAbbott
    Mar 19, 2016 at 4:54
  • 'welcome. The exercise is pretty interesting. Not the same $2.78, more like 1.4%. i.e. the premium for 30 days out on SPY looked like 1.4% of its price. I was trying to offer a framework of how to set up a back-test. I understand your proposal. Mine was less involved, a way to cut/paste equations to calculate a monthly return. Choosing strikes other than at the money implies you need to manually input each line of data. Mar 19, 2016 at 12:07
  • Here's a very simple simulation over 12 months. It starts with last Dec to March and then repeats for the rest of the year until Dec. 1. docs.google.com/spreadsheets/d/…
    – RussAbbott
    Mar 20, 2016 at 16:42
  • Not understanding the math. At SPY 188, how can the 203 strike have a $2.63 premium? And, just repeating 3 months of data isn't a good way to back test a strategy. At the very least you need an up year, a down year, and flat year to get an idea of what to expect. Even then, that's just a start. Mar 20, 2016 at 17:27

Why do all this work yourself? Pay a modest price to have a professional do this for you. Look at the tickers PUTX, PUTW.

  • +1 for the interesting find. Curious though, the ETF you showed is around less than a year. What I'd imagine the OP would like is a back-tested set of data showing how such a strategy performs over time. I'm imagining a decent return in flat markets, lagging in strong bull markets, and doing poorly in falling markets. Mar 18, 2016 at 10:58
  • @JoeTaxpayer yeah, I am keeping a watch on these two, myself. I have not, yet, bought into them. Mar 18, 2016 at 11:32
  • @JackSwayzeSr. Thanks for the pointers. Hadn't known about them. As others have suggested correct option pricing would suggest that PUTW and SP500 would have similar returns. What I would add to PUTW is rolling losing puts. It would seem that one can always roll a losing put position. With enough patience it should turn into a non-losing position. This is a modified Martingale, but one that seems likely not to blow up.
    – RussAbbott
    Mar 18, 2016 at 18:39
  • @RussAbbott On and off I have tried to make money using options. Lately, when I develop what I think is going to be a winning strategy, I discover an ETF that, also, just developed that strategy. So now I am relying on an ETF to do my trading for me. (Full disclosure, I am, now, long on TQQQ.) Mar 18, 2016 at 20:51
  • TQQQ looks like just a 3 x QQQ. I don't see the option aspect.
    – RussAbbott
    Mar 19, 2016 at 4:34

Option prices are computed by determining the cost of obtaining the option returns using a strategy that trades the underlying asset continuously. It sounds like what you are describing is rapidly trading the option in order to obtain returns similar to those of the stock. The equality goes both ways.

If the option is appropriately priced, then a strategy that replicates stock returns using the option will cost the same as buying the stock.

Because you can't trade continuously, you won't actually be able to replicate the stock return, and it may seem like you are making arbitrage profit (puts may seem abnormally expensive), but you do so by bearing tail risk (i.e., selling puts loses more money than owning the associated stock if an unusually bad event occurs).

  • Selling a put for the same amount of stock that one would buy has no additional risk. If the price declines one can roll the put for a longer term put at a lower strike and reduce the loss. I assume one won't get all the upside, but won't this strategy allow one to reduce the potential downside and still reap a significant amount of the upside? Really I wan't to know if any empirical studies have been done.
    – RussAbbott
    Mar 17, 2016 at 17:13
  • @RussAbbott Selling the put has different risk than buying the stock. Your understanding of how the options are priced seems to be somehow confused. I think that you're not accounting for the time value of the option, which will move in a non-linear relationship to the stock price. If you wait long enough, you'll get close to expiration and the time value will be essentially gone, but you have to hold until expiration to get that - which, if that's your strategy, involves the risk of holding.
    – user32479
    Mar 17, 2016 at 19:41
  • Russ, no additional risk, perhaps, but no gain either, or at least very little. When you sell a put and the stock rises $100, how much do you gain? Mar 18, 2016 at 0:19
  • Russ, my point is that options carve up the risk/reward of a stock. Every bit of expected profit from an options strategy is tied to a corresponding risk. There are no strategies, no matter how funky, with correctly priced options that have extra reward for the same risk or the same reward for less risk as any strategy with stock.
    – farnsy
    Mar 19, 2016 at 3:15

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