I TESTED EVERY SINGLE OPTIONS STRATEGY FOR 12 YEARS...

SUMMARY

Brandon, an experienced investor with over $3 million in net worth, critiques widely used options strategies after analyzing their performance over 12 years. He argues that most retail-focused strategies, such as covered calls and cash secured puts, underperform the market in the long run, advocating instead for long-duration, conviction-based trades.

MAIN POINTS

• Covered calls are criticized for capping upside and failing to provide meaningful downside protection, making them ineffective for long-term portfolio growth. [0:00]
• Cash secured puts are described as capital-inefficient, with the opportunity cost of tying up large amounts of cash outweighing the limited premium earned. [3:00]
• The poor man's covered call is dismissed as a strategy for those lacking capital, with its structure criticized for mixing bullish and bearish positions simultaneously. [6:00]
• Spreads are compared to hedging without conviction, with the argument that top investors like Warren Buffett do not use such strategies and instead focus on clear bullish or bearish positions. [9:00]
• Short-duration options are seen as unreliable due to the unpredictability of short-term market movements, with a preference expressed for investing for total return rather than seeking monthly cash flow. [12:00]
• The advocated approach is to buy undervalued companies and use long-duration options only to magnify high-conviction trades, securing positions with the core portfolio rather than idle cash. [15:00]

DETAILED ANALYSIS

A comprehensive evaluation of popular options strategies over a 12-year period reveals significant shortcomings in approaches frequently adopted by retail investors. Covered calls, despite their popularity, are criticized for simultaneously capping potential gains while offering negligible downside protection. The analysis highlights that while covered calls may generate modest short-term cash flow, they ultimately hinder long-term portfolio growth by limiting appreciation, often resulting in underperformance compared to simply holding broad market indices like the S&P 500.

Cash secured puts are similarly scrutinized for their inefficiency. The requirement to hold substantial cash reserves in the account is identified as a major drawback, especially when the underlying stock appreciates significantly. The opportunity cost of not deploying this capital directly into equities is emphasized, as the limited premium collected from selling puts pales in comparison to the potential returns from stock appreciation.

Historical market surges, such as rapid rallies following geopolitical events, serve as examples where cash secured put sellers miss out on substantial gains.

The poor man's covered call, which involves buying a long-term call option (LEAP) and selling shorter-term calls against it, is dismissed as a strategy primarily adopted by those with limited capital. The critique centers on the internal contradiction of being both bullish and bearish on the same asset, which dilutes the effectiveness of the position. The argument is made that if conviction in a stock is high, it is more logical to wait for a favorable entry point rather than immediately capping upside through call selling.

Spreads, including vertical spreads, are also called into question. The analysis draws a parallel to hedging without true conviction, noting that legendary investors such as Warren Buffett never employ such tactics. Instead, the recommendation is to adopt clear, high-conviction positions—either bullish or bearish—without the simultaneous hedging that spreads entail.

The capital used to buy protective legs in spreads could be better allocated to increasing exposure to well-researched, fundamentally sound companies.

Short-duration options strategies, often justified by the appeal of rapid theta decay, are described as unreliable due to the inherent unpredictability of short-term market movements. The pursuit of monthly cash flow through frequent option selling is contrasted with the long-term wealth accumulation achieved by investors who focus on total return. The example of Warren Buffett is used to illustrate the dramatic difference in outcomes between investing for yield and investing for appreciation, with the latter vastly outperforming over decades.

The preferred approach advocated is to invest in high-quality companies trading below intrinsic value and to use long-duration options, such as one-year-plus puts or calls, only to magnify trades with exceptional conviction. Rather than securing options with idle cash, the strategy involves leveraging the core portfolio—composed of broad indices and select equities—to back these positions, thereby avoiding cash drag and maintaining robust risk management. This disciplined, conviction-driven method is presented as the most effective way to achieve superior long-term returns while minimizing unnecessary complexity and inefficiency.

LINKS

• 10 Day Stocks & Options Transformation and Discord community.
• Video explaining how stock options really work.
• Brandon's X (Twitter) profile.
• Weekly newsletter subscription from InvestingWithBrandon.

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