When Professors Crack the Code: How Taiwan Researchers Just Solved Option Writing's Biggest Problem

While Wall Street's finest were busy chasing the latest momentum stock or cryptocurrency, two researchers in Taiwan, Chien-Ling Lo and Wen-Rang Liu, were quietly solving one of options trading's most persistent puzzles: How do you capture the statistical edge of selling premium without getting crushed during market rallies?

Their answer, published in the Pacific Basin Finance Journal, is elegantly simple and devastatingly effective.

The Problem Every Option Seller Knows

Anyone who's systematically sold options knows the frustration. You collect premium month after month, building steady returns, until the market decides to rocket higher and you're left watching from the sidelines, having capped your upside for a measly premium payment.

The academics call this "underperformance during market rallies." Real traders call it the price of admission to the option selling game. Or so we thought.

The Taiwan Solution: It's All About Timing

Lo and Liu discovered something remarkable while studying Taiwan's options market, one of the few global markets where retail investors dominate derivatives trading, much like the early days of U.S. options. They found that the put-call ratio (PCR) could predict when option selling would work and when it wouldn't.

Their strategy is brilliantly simple: When the put-call ratio is high (indicating market pessimism), fully invest in the market index. When the PCR is low (suggesting complacency), that's when you sell options and collect premium.

The Numbers Tell the Story

Over 201 months from March 2007 to December 2023, their conditional approach transformed mediocre strategies into market-beating machines:

• Conditional put-write strategy: Sharpe ratio jumped from 0.55 to 0.86

• Conditional covered calls: Sharpe ratio improved from 0.48 to 0.71

• Risk reduction: All strategies showed lower maximum drawdowns

• Trade frequency: Cut by more than half, reducing transaction costs

Most importantly, they solved the rally problem. Instead of missing bull markets, their approach participates fully when conditions favor equity ownership.

Why This Matters Beyond Taiwan

The beauty of Lo and Liu's research lies in its universal application. The put-call ratio exists in every major options market, and investor psychology, the tendency to get fearful at bottoms and complacent at tops, is a global phenomenon.

Their work validates what systematic option traders have long suspected: The key isn't just what you sell, but when you sell it.

Connecting the Academic Dots

This research dovetails perfectly with earlier findings from Michael L. Hemler (Notre Dame) and Thomas W. Miller Jr. (Mississippi State), who demonstrated that systematic options strategies outperform buy-and-hold investing. The Taiwan study adds the crucial timing component that transforms good strategies into great ones.

The CBOE's own research on cash-secured puts, showing 1,153% returns versus the S&P 500's 807% over 25+ years, already proved the "what." Lo and Liu have now cracked the "when."

The Real-World Application

This isn't just academic theory. The researchers tested their approach using actual futures contracts to address real-world trading challenges like market timing differences and transaction costs. The results held up under practical conditions.

For systematic option traders, this research provides a framework for dramatically improving timing decisions. Instead of mechanically selling options every month, the put-call ratio offers a systematic way to optimize entry points.

In my wheel strategy framework, this kind of timing intelligence could enhance both the cash-secured put entry phase and the covered call exit decisions. The goal isn't to time markets based on gut feelings, it's to use systematic indicators that reflect actual market positioning and sentiment.

The Bottom Line

Lo and Liu have done something remarkable: They've taken option selling from a decent income strategy to a market-beating approach by solving the timing puzzle. Their work proves that with the right systematic framework, you can have your cake and eat it too, collecting option premium and participating in market rallies.

The professors have shown us the path. The question is whether we have the discipline to follow their systematic approach instead of our emotional impulses.

Learn how to implement systematic option timing in practice: The Wheel Strategy Guide

Advanced timing techniques for cash-secured puts: The Income Foundation

Probabilities over predictions,

Andy Crowder

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Research Citation: Lo, Chien-Ling and Liu, Wen-Rang, "Low risk, high return: Improving option writing performance with put-call ratios in Taiwan," Pacific Basin Finance Journal, 2025.

Supporting Research:

• Hemler, Michael L. and Miller Jr., Thomas W., "The Performance of Options-Based Investment Strategies"