Three Options Strategies Backed by Decades of Research (And What the Studies Actually Found)

Covered calls, cash-secured puts, and collars are not internet fads. They are among the most studied strategies in modern finance, and the findings are worth knowing precisely.

If you spend any time around options content, you will hear two stories. The first, from the hype machine, says options are a casino where fortunes are made overnight. The second, from the fearful, says options are a casino where fortunes are lost overnight. Both stories are about the same casino, and both miss the point, because there is a third story, and it is the only one with decades of academic receipts behind it.

Three strategies, covered calls, cash-secured puts, and collars, have been studied by finance professors, benchmark providers, and institutional consultants since before some of today's traders were born. The results are consistent, measurable, and honestly encouraging, provided you read them for what they actually say rather than what a marketer wishes they said. This guide walks through all three: what each strategy is in plain English, what the research genuinely found, and, because this letter does not do cherry-picking, the fine print the studies themselves include.

First, the Engine All Three Share

Before the individual strategies, understand the one idea underneath all of them, because it explains why the research keeps finding the same thing.

An option is insurance. The buyer pays a premium to transfer a risk; the seller collects that premium for absorbing it. And decades of market data show that, on average, buyers pay a little more for that insurance than the subsequent movement justifies, the same way homeowners collectively pay insurers more than the storms end up costing. That persistent gap has a name, the volatility risk premium, and it is the paycheck of everyone on the selling side. It is not free money; it is compensation for absorbing risk, the way an insurer's profit is. But it is real, durable, and documented, and each of the three strategies below is simply a different chassis built around this same engine. One harvests it for income on stocks you own. One harvests it while waiting to buy stocks you want. One spends part of it to buy protection.

Strategy One: The Covered Call, and the Eighteen-Year Report Card

The strategy, in plain English. You own at least 100 shares of a stock or fund. You sell someone the right to buy those shares from you at a higher price, the strike, before a set date. For selling that right, you collect cash immediately. If the shares stay below the strike, you keep the shares and the cash, and you can do it again next month. If the shares rise past the strike, you sell them at that price, keeping the cash and the gains up to the strike. The trade-off is honest and unavoidable: you have converted unlimited upside into income plus capped upside.

A quick example. You own 100 shares of an index fund at $450. You sell next month's $460 call for $2.00, collecting $200. Flat or down market: you keep the $200, which softens any decline. A rally to $470: your shares are called at $460, and you keep the $10 per share of gains plus the $200, having given up the last $10 of the move. That surrendered piece is the cost of the income, and everything the research says flows from that exchange.

What the research found. In 2002, Cboe commissioned Professor Robert Whaley of Vanderbilt to build the first major covered-call benchmark, the S&P 500 BuyWrite Index, ticker BXM, which mechanically sells a one-month at-the-money call on the S&P 500 every month, forever, with no discretion. Then in 2006, the institutional consultant Callan Associates evaluated eighteen years of it, June 1988 through August 2006, and the numbers are worth quoting exactly: the BXM compounded at 11.77 percent annually against 11.67 percent for the S&P 500 itself, and it did so with a standard deviation of 9.29 percent against the index's 13.89. In plain terms: essentially the same return as the market, with roughly two-thirds of the bumpiness, which is why its risk-adjusted score, the return earned per unit of that bumpiness, came out clearly superior. The strategy also kept collecting premium straight through the crashes inside that window, which is what "smaller drawdowns" looks like when you live it.

Strategy Two: The Cash-Secured Put, and the Thirty-Two-Year Scorecard

The strategy, in plain English. You pick a stock or fund you would genuinely like to own, at a price below today's. You sell someone the right to sell you those shares at that price, setting aside the full cash to buy them, and you collect a premium immediately for standing ready. If the shares stay above your strike, nobody sells you anything, you keep the premium, and you can do it again. If the shares fall below, you buy them at the strike, the price you already chose, with the premium reducing your true cost further. Either outcome was acceptable before you started: paid to wait, or paid to buy at a discount.

A quick example. A $50 stock you would happily own at $48. Sell the $48 put for $0.75, setting aside $4,800. Above $48 at expiration: keep the $75, repeat. Below $48: you own the shares at an effective $47.25, about five and a half percent below where the stock traded when you started, which is exactly how Wheel campaigns begin.

What the research found. Cboe's PutWrite Index, ticker PUT, does mechanically what you just read: it sells a fully cash-secured at-the-money put on the S&P 500 every month, with index history reaching back to mid-1986. Professor Oleg Bondarenko of the University of Illinois at Chicago has studied it in depth, first in a 2016 analysis and again in a 2019 update covering more than thirty-two years of history, and the scorecard rhymes with the covered call's: a compound annual return comparable to the S&P 500's, earned with a substantially lower standard deviation, producing an annualized Sharpe ratio, that same return-per-unit-of-bumpiness score, of 0.65 for the put-writing index against 0.49 for the S&P 500. Bondarenko's work also identifies where the result comes from, and it is the engine from the top of this piece: the persistent premium collected for insuring the market against declines. Sellers were not lucky for three decades. They were paid, consistently, for a service.

Strategy Three: The Collar, and the Decade That Proved It

The strategy, in plain English. You own shares with gains you want to protect. You sell a call above the market, collecting a premium and accepting a ceiling, and you use that premium to buy a put below the market, installing a floor. The result is a band: bounded loss, bounded gain, and a safety zone in between, often at little or no net cost. The honest price, covered at length in this letter's dedicated collar guide, is the surrendered tail: the fence was paid for with every dollar the shares might have earned above the call strike.

A quick example. Shares at $100. The $90 put costs $2.00; the $110 call pays $2.00. The collar goes on for nothing, the worst case from here is 10 percent, the best case is plus 10, and everything in between requires no decisions at all.

What the research found. This is the study with the most dramatic report card, because the researchers happened to test the strategy across the most hostile decade imaginable. In a study from the University of Massachusetts' CISDM research center, Edward Szado and Thomas Schneeweis examined a systematic collar on the Nasdaq-100 ETF from March 1999 through May 2009, a 122-month window containing both the dot-com collapse and the financial crisis. Over that full period, the buy-and-hold position lost roughly a third of its value. The passive collar returned nearly 150 percent, while cutting risk by more than 60 percent. Read that pairing again, because it is the entire argument for protection made in one sentence: across a decade with two historic crashes, the "boring" strategy that voluntarily capped its upside did not merely lose less. It finished dramatically ahead, because avoiding the catastrophic drawdowns mattered more than catching the last dollar of the rallies. The authors are equally honest about the flip side, and so will we be: in sustained rising markets, the collar's ceiling costs real performance, and the same study found it least effective there. Protection is for the storms, and it is priced accordingly in the sunshine.

The Fine Print the Studies Themselves Include

Now the part a marketer would skip, which is precisely why it belongs here. Three honest qualifications frame everything above.

The studies test the engine, not your account. Every benchmark result above is a systematic, no-discretion strategy on a broad index, selling at-the-money options monthly, measured before transaction costs. Your version will differ: you will likely sell out-of-the-money strikes on individual names, manage positions rather than hold every one to expiration, and pay real spreads and commissions. The research is powerful evidence that the underlying engine, the volatility risk premium, is real and durable. It is not a promise that your implementation will match an index's printout, and anyone quoting these studies as a forecast of your returns is selling something.

Every strategy pays for its benefit somewhere. The covered call and the cash-secured put both lag the market in roaring bull runs, because capped upside and paid patience are the wrong tools for a melt-up. The collar lags in any sustained rally, by design. The studies do not hide this; the BXM's near-match with the index is an average across regimes in which it sometimes trailed badly and sometimes won by refusing to fall. If you cannot accept the seasons where your strategy is the wrong one, you will abandon it at exactly the wrong time and collect the costs of every approach with the benefits of none.

Risk-adjusted is the honest scoreboard. The recurring finding across all three bodies of research is not "more return." It is comparable return at meaningfully lower risk, which for a real human with a real retirement date is usually the better trade by a wide margin, because the sequence of your returns, and whether you emotionally survive the drawdowns, determines what you actually keep. The academic literature's larger conclusion, that option-selling returns are substantially compensation for absorbing genuine risk, cuts both ways: the paycheck is real, and so is the job.

The Bottom Line

Three strategies, three independent bodies of research, one consistent conclusion: selling options within a disciplined structure has paid a real, durable premium for decades, delivering market-like returns at meaningfully lower risk, in exchange for honestly disclosed costs, capped upside here, surrendered tails there, and seasons in every case where the strategy trails. That is not a casino story in either direction. It is a business story: collect premiums, absorb defined risks, respect the fine print, and let the engine compound.

The hype machine cannot sell that story, because it does not promise anything by Friday. The research has been telling it, quietly and consistently, since 1986.

Trade Smart. Trade Thoughtfully.

Andy Crowder

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