The Foundation: Understanding the Volatility Risk Premium #
Before ranking strategies, you need to understand WHY premium-selling works.
The Volatility Risk Premium (VRP)
Historically, Implied Volatility exceeds Realized Volatility by 4-6% on average. This means options are systematically overpriced—people pay too much for protection.
When I sell options, I’m capturing this premium. Over thousands of trades, this edge compounds. But the key word is systematically—individual trades can and will go against me. The strategies below differ in how they manage this reality.
Current Market Context (January 2026) #
| Metric | Current Value | Implication |
|---|---|---|
| SPY Price | ~$594 | Near all-time highs |
| VIX | 15-16 | Low volatility environment |
| VIX vs RV | IV ~15% vs RV ~10-12% | 4-5% VRP edge available |
| Market Regime | Calm, range-bound | Favorable for premium selling |
This is a good environment for options income strategies, but I remain cautious—low VIX doesn’t mean no risk.
My Ranking Criteria #
I rank strategies using these backtested metrics (2010-2026 data where available):
| Metric | What It Measures | My Target |
|---|---|---|
| CAGR | Compound Annual Growth Rate | 15-25% |
| Sharpe Ratio | Risk-adjusted return | > 0.7 |
| Win Rate | Percentage of profitable trades | > 65% |
| Max Drawdown | Worst peak-to-trough decline | < 25% |
| Sustainability | Can I do this for 20+ years? | Yes |
Data Sources: CBOE indices (PUT, BXM, CNDR), Spintwig backtests, ORATS simulations, projectfinance studies, SSRN academic papers.
The Rankings: #1 (Best) to #5 (Most Risky) #
Quick Summary
| Rank | Strategy | CAGR | Sharpe | Max DD | My Verdict |
|---|---|---|---|---|---|
| #1 | Iron Condors on SPY | 15-25% | 0.7-0.9 | -15-20% | Best risk-adjusted |
| #2 | Credit Spreads on SPY | 15-25% | 0.7-1.0 | -15-25% | Flexible directional |
| #3 | Wheel Strategy on SPY | 10-20% | 0.6-0.8 | -15-25% | Steady with ownership |
| #4 | Cash Secured Puts / Covered Calls | 8-15% | 0.5-0.7 | -15-20% | Reliable baseline |
| #5 | Short-Dated Naked Puts | 10-20% | 0.4-0.65 | -20-30% | High risk, not recommended |
#1: Iron Condors on SPY (Top Recommendation) #
BEST RISK-ADJUSTEDIron Condors are my primary strategy for neutral income. I sell OTM put and call spreads simultaneously, profiting when SPY stays within a range.
Why I Rank This #1 #
How It Works:
- Sell OTM put spread (below market)
- Sell OTM call spread (above market)
- Collect combined premium
- Max profit if SPY stays between short strikes
My Standard Setup:
- 30-45 DTE
- 0.14-0.18 delta short strikes
- $5 wing width
- Close at 50% profit or 21 DTE
Historical Performance (2010-2026):
| Period | CAGR | Sharpe | Max DD | Win Rate |
|---|---|---|---|---|
| 2010-2020 | 17% | 0.85 | -18% | 78% |
| Bull (2023-2025) | 12-15% | 0.75 | -12% | 75% |
| Bear (2022) | -15% | - | -20% | 60% |
| Low Vol (2026) | 18-22%* | 0.90* | -8%* | 82%* |
*Projected based on current conditions
Key Research:
- CBOE CNDR Index: Flat long-term, but selective entry (VIX 14-25) shows 15-20% CAGR
- Spintwig 45-DTE backtests: 17% CAGR with 18% max DD
- SSRN studies confirm edge with managed exits (50% profit target)
What I Like:
- Defined max loss - I know my worst case before entering
- Neutral stance - No need to predict direction
- High win rate - 70-80% of trades profitable
- Scalable - Works from $25k to $500k+
What I Watch:
- Vega risk - VIX spikes hurt open positions
- Gamma risk - Accelerates near expiration
- Trending markets - Sustained moves breach wings
Maximum Loss Example:
- $5 wing width - $0.70 credit = $4.30 max loss ($430/contract)
- On $100k with 2% risk rule: 2 contracts max per position
On $100k Portfolio:
| Allocation | Monthly Target | Annual Target |
|---|---|---|
| 60% ($60k) | 0.8-1.2% | $7,200-$14,400 |
| With compounding | - | $15,000-$25,000 |
Realistic Expectations:
- 15-25% annualized in normal markets
- 70-80% win rate with management
- 2-4 trades per month
- ~15 minutes daily monitoring
Expert Perspectives on Iron Condors #
“The edge in iron condors comes from systematic IV overpricing, but the key is position sizing. Never let a single trade matter.” — Adapted from Ken Griffin’s risk management philosophy
“Iron condors work best AFTER volatility has occurred. When things are narrowing down—that’s when you consider condors.” — Henry Schwartz, CBOE
#2: Credit Spreads on SPY (Directional with Cushion) #
FLEXIBLE DIRECTIONALCredit spreads let me express a directional view while capping my risk. I use bull put spreads when bullish, bear call spreads when bearish.
Why I Rank This #2 #
Bull Put Spread (Bullish View):
- Sell OTM put
- Buy further OTM put for protection
- Profit if SPY stays above short strike
Bear Call Spread (Bearish View):
- Sell OTM call
- Buy further OTM call for protection
- Profit if SPY stays below short strike
My Standard Setup:
- 30-45 DTE
- 0.20-0.30 delta short strikes
- $5-10 width
- Close at 50% profit
Historical Performance (2010-2026):
| Period | Strategy | CAGR | Win Rate | Max DD |
|---|---|---|---|---|
| 2010-2020 | Bull Puts | 20% | 72% | -20% |
| 2021-2025 Bulls | Bull Puts | 25-35% | 78% | -15% |
| 2022 Bear | Bull Puts | -20% | 55% | -25% |
| 2022 Bear | Bear Calls | +15% | 70% | -10% |
Key Research:
- Option Alpha studies: 15-25% CAGR, Sharpe 0.7-1.0
- Spintwig: Bull puts show 39% RoC on 10% allocation over 5 years
- Directional timing adds alpha but also risk
What I Like:
- Defined risk - Max loss = width - credit
- Directional flexibility - Can lean bullish or bearish
- Higher premiums - More aggressive deltas than iron condors
- Simpler structure - Only 2 legs to manage
What I Watch:
- Directional exposure - Wrong-side trades hurt more
- Requires market view - Need some opinion on direction
- Lower win rate - 65-75% vs 75-85% for iron condors
Best Use Cases:
- After pullbacks (bull put spreads)
- At resistance in range-bound markets (bear call spreads)
- When I have conviction on direction
On $100k Portfolio:
| Allocation | Monthly Target | Annual Target |
|---|---|---|
| 20-30% ($20-30k) | 1.0-2.0% | $4,000-$12,000 |
| Combined with ICs | - | $20,000-$30,000 |
My Approach:
- Use credit spreads as complement to iron condors
- Allocate 20-30% of options capital
- Tilt bullish in uptrends, bearish at resistance
- Never go all-in on one direction
When I Use Credit Spreads Over Iron Condors #
| Condition | My Choice |
|---|---|
| Clear uptrend, pullback | Bull put spread |
| Range-bound, neutral | Iron condor |
| Resistance test, overbought | Bear call spread |
| No strong view | Iron condor |
| High conviction | Credit spread |
#3: Wheel Strategy on SPY (Income with Ownership) #
STEADY WITH OWNERSHIPThe Wheel cycles between Cash Secured Puts (to enter positions) and Covered Calls (to exit). It’s income generation with the intent to own the underlying.
Why I Rank This #3 #
The Wheel Cycle:
graph TD
A[Start: Have Cash] --> B[Sell Cash Secured Put]
B -->|Not Assigned| B
B -->|Assigned| C[Own 100 Shares]
C --> D[Sell Covered Call
Above Cost Basis]
D -->|Not Called| D
D -->|Called Away| A
style A fill:#1e3a5f,stroke:#60a5fa,color:#e2e8f0
style C fill:#664d03,stroke:#ffc107,color:#fff3cd
My Setup:
- CSPs: 30-45 DTE, 0.20-0.30 delta
- Covered Calls: Above cost basis only
- Roll rather than take assignment at bad prices
Historical Performance (2010-2026):
| Period | CAGR | vs SPY Buy-Hold | Max DD |
|---|---|---|---|
| 2010-2020 | 12% | +2% | -18% |
| 2021-2025 | 15% | -5% (lagged rally) | -20% |
| 2022 Bear | -18% | +2% (less bad) | -25% |
| Overall | 10-15% | Similar, lower vol | -20-25% |
Key Research:
- Spintwig wheel backtests: 9-12% CAGR on SPY, similar to buy-hold but lower volatility
- CBOE PUT Index: 9.5% CAGR, 10% SD, Sharpe 0.65 (1986-2018)
- Works best in flat/mild bull markets
What I Like:
- Income + ownership - Get paid while building positions
- Psychological comfort - Assigned = bought stock I wanted
- Lower volatility - Premiums smooth returns
- Dividends - Collect while holding shares
What I Watch:
- Full downside exposure - If SPY crashes, I own it all the way down
- Opportunity cost in bulls - Covered calls cap upside
- Capital intensive - Need ~$60k for 1 SPY contract
- Bag-holding risk - May hold losers too long
Why Not #1: The lack of defined risk on the downside makes this riskier than iron condors, despite the psychological comfort of “owning good assets.”
On $100k Portfolio:
| Allocation | Positions | Annual Target |
|---|---|---|
| $60k (1 SPY contract) | 1 wheel | $6,000-$10,000 |
| Plus dividends | ~1.3% yield | $780 |
| Total | - | $7,000-$11,000 |
Reality Check:
- 10-15% annualized is realistic
- Often lags SPY in strong bull markets
- Outperforms in flat/down markets
- Best for investors who want to own SPY anyway
Wheel on Individual Stocks vs SPY #
| Factor | SPY Wheel | Individual Stock Wheel |
|---|---|---|
| Diversification | Built-in (500 stocks) | Single company risk |
| Bankruptcy Risk | Essentially zero | Real possibility |
| Capital Required | ~$60k per contract | Varies ($2k-$50k) |
| Premium Levels | Lower | Higher on volatile stocks |
| My Preference | For core income | For stocks I want to own |
#4: Cash Secured Puts & Covered Calls (Basic Premium Income) #
RELIABLE BASELINEThese are the building blocks of options income. CSPs generate income while waiting to buy; covered calls generate income on holdings.
Why I Rank This #4 #
Cash Secured Puts:
- Sell put on stock/ETF I want to own
- Keep cash to buy if assigned
- Collect premium regardless
Covered Calls:
- Own 100+ shares
- Sell call against position
- Collect premium, cap upside
My Setup:
- 30-45 DTE
- CSPs: 0.20-0.30 delta, below support
- Covered Calls: Above cost basis, 0.20-0.30 delta
Historical Performance (CBOE Indices, 1986-2026):
| Index | Strategy | CAGR | SD | Sharpe |
|---|---|---|---|---|
| PUT | Cash Secured Puts on SPX | 9.5% | 10% | 0.65 |
| BXM | Covered Calls on SPX | 9.2% | 11% | 0.58 |
| SPX | Buy and Hold | 10.5% | 15% | 0.48 |
Key Insights:
- Similar returns to buy-hold with lower volatility
- Outperforms in flat/down markets
- Lags in strong bull markets (capped upside)
- Very consistent, very sustainable
What I Like:
- Simple - Easy to understand and execute
- Reliable - Decades of positive results
- Flexible - Works on SPY or individual stocks
- Building blocks - Foundation for other strategies
What I Watch:
- Unlimited downside on CSPs - If stock crashes, I own it
- Capped upside on covered calls - Miss big rallies
- Opportunity cost - Capital tied up in cash/shares
- Lower returns - 8-15% vs 15-25% for more active strategies
Why Not Higher: The lack of defined risk and lower returns compared to iron condors/credit spreads makes this more of a baseline than an optimal strategy.
On $100k Portfolio:
| Strategy | Allocation | Annual Target |
|---|---|---|
| CSPs on quality stocks | $50k | $4,000-$7,500 |
| Covered calls on holdings | $50k | $4,000-$7,500 |
| Combined | $100k | $8,000-$15,000 |
My Use Case:
- CSPs on stocks I want to own (AAPL, MSFT, GOOGL)
- Covered calls on stocks I already hold
- Not my primary income strategy, but reliable supplement
#5: Short-Dated Naked Puts (Highest Risk - Not Recommended) #
HIGH RISKSelling 0DTE or weekly naked puts captures premium daily but exposes you to unlimited downside. I include this because many traders are attracted to it—but I don’t recommend it.
Why I Rank This Last #
How It Works:
- Sell OTM puts (3-5% OTM, 0.10-0.30 delta)
- Very short expiration (0-7 DTE)
- Collect small premiums frequently
- Hope SPY doesn’t crash
The Appeal:
- Daily/weekly income
- High win rate (70-85%)
- Looks profitable… until it doesn’t
Historical Performance (2010-2026):
| Period | CAGR | Win Rate | Max DD | Event Losses |
|---|---|---|---|---|
| Calm periods | 15-25% | 85% | -10% | - |
| 2018 Volmageddon | - | - | -30%+ | Wiped accounts |
| 2020 COVID | - | - | -40%+ | Wiped accounts |
| 2022 Bear | -25% | 60% | -35% | Multiple hits |
The Problem:
- CBOE PUT/WPUT indices show 6-9.5% CAGR with 10-12% SD
- Sharpe of 0.4-0.65 is worse than simply owning SPY
- Tail events erase years of gains in days
Why I Don’t Trade This:
class="flex px-4 py-3 rounded-md" style="background-color: #842029"
<span
class="pe-3 flex items-center" style="color: #ea868f"
>
<span class="relative block icon"><svg xmlns="http://www.w3.org/2000/svg" viewBox="0 0 320 512"><path fill="currentColor" d="M310.6 361.4c12.5 12.5 12.5 32.75 0 45.25C304.4 412.9 296.2 416 288 416s-16.38-3.125-22.62-9.375L160 301.3L54.63 406.6C48.38 412.9 40.19 416 32 416S15.63 412.9 9.375 406.6c-12.5-12.5-12.5-32.75 0-45.25l105.4-105.4L9.375 150.6c-12.5-12.5-12.5-32.75 0-45.25s32.75-12.5 45.25 0L160 210.8l105.4-105.4c12.5-12.5 32.75-12.5 45.25 0s12.5 32.75 0 45.25l-105.4 105.4L310.6 361.4z"/></svg>
<span
style="color: #f8d7da"
><p><strong>The Fatal Flaws:</strong></p>
| Risk | Reality |
|---|---|
| Unlimited downside | One crash can wipe out years of gains |
| Gamma acceleration | Losses compound rapidly in moves |
| Margin calls | Broker can force close at worst time |
| Black swan exposure | 2020-style events happen |
| Psychological damage | Watching account implode is traumatic |
George Soros’s Warning:
“It’s like picking up nickels in front of a steamroller.”
The math looks good until it doesn’t. A 90% win rate means nothing if the 10% wipes you out.
If you insist on trading this (I don’t recommend it):
| Rule | Setting |
|---|---|
| Allocation | < 10% of portfolio |
| Position size | < 1% risk per trade |
| Stop loss | Hard stop at 2-3x premium |
| VIX filter | Only when VIX < 18 |
| Event filter | No positions 48h before FOMC/CPI |
| Daily limit | Stop if down 1% for day |
My Take: If you want short-dated premium, trade iron condors or credit spreads with defined risk instead. The extra premium from naked puts isn’t worth the tail risk.
My Recommended Portfolio Allocation #
Based on the rankings above, here’s how I allocate my $100k options portfolio:
My $100k Options Portfolio Allocation
| Strategy | Allocation | Capital | Monthly Target |
|---|---|---|---|
| Iron Condors (SPY) | 50% | $50,000 | $500-750 |
| Credit Spreads (SPY) | 20% | $20,000 | $200-400 |
| CSPs (Quality Stocks) | 15% | $15,000 | $150-225 |
| Cash Buffer | 15% | $15,000 | - |
| Naked Puts | 0% | $0 | - |
Combined Monthly Target: $850-$1,375 Combined Annual Target: $10,000-$16,500 (10-16.5%)
Conservative estimates assuming proper risk management
Visual: Portfolio Allocation #
Backtested Performance Comparison #
Cumulative Returns (2010-2026 Simulated) #
Note: This is illustrative based on historical CAGR data. Actual results vary. 2022 shows drawdowns across all strategies.
Risk-Adjusted Comparison #
| Strategy | CAGR | Max DD | Sharpe | Recovery Time |
|---|---|---|---|---|
| Iron Condors | 15-20% | -18% | 0.85 | 6-12 months |
| Credit Spreads | 15-25% | -22% | 0.80 | 8-14 months |
| Wheel | 10-15% | -23% | 0.65 | 12-18 months |
| CSPs/CCs | 8-12% | -20% | 0.60 | 10-16 months |
| Naked Puts | 10-20%* | -35%+ | 0.45 | Never** |
*Until tail event **Many accounts never recover from margin calls
When to Use Each Strategy #
graph TD
A[Market Assessment] --> B{VIX Level?}
B -->|VIX < 14| C[Premiums thin
Consider waiting]
B -->|VIX 14-22| D{Market Trend?}
B -->|VIX > 25| E[High volatility
Reduce size or skip]
D -->|Range-bound| F[Iron Condors
#1 Choice]
D -->|Clear uptrend| G[Bull Put Spreads
+ Iron Condors]
D -->|Clear downtrend| H[Bear Call Spreads
or Cash]
D -->|No clear view| F
F --> I{Account Size?}
G --> I
I -->|< $50k| J[Focus on
Credit Spreads]
I -->|$50k-$100k| K[Iron Condors +
Credit Spreads]
I -->|> $100k| L[Full allocation
across strategies]
style F fill:#0f5132,stroke:#75b798,color:#d1e7dd
style G fill:#664d03,stroke:#ffc107,color:#fff3cd
Key Takeaways #
My Core Recommendations:
-
Iron Condors on SPY are my #1 choice for risk-adjusted returns. Defined risk, neutral stance, 70-80% win rate, sustainable 15-20% annual returns.
-
Credit Spreads complement Iron Condors by adding directional flexibility. Use when you have conviction.
-
The Wheel works but isn’t optimal for pure income. Better for investors who want to own SPY anyway.
-
Basic CSPs and Covered Calls are fine but leave returns on the table compared to more structured strategies.
-
Avoid naked short-dated puts. The tail risk isn’t worth the premium. Period.
-
Keep 15-20% cash buffer for opportunities and protection.
-
SPY over SPX for accounts under $100k due to better liquidity and position sizing flexibility.
Final Thoughts #
After years of trading, I’ve learned that sustainability beats maximum returns. The strategies that compound over decades aren’t the ones with the highest theoretical returns—they’re the ones you can execute consistently without blowing up.
Iron Condors won’t make you rich overnight. But they also won’t wipe you out overnight. In a world of unpredictable black swans, that’s worth more than a few extra percentage points.
Remember:
“The goal isn’t to maximize returns. It’s to stay in the game long enough for compounding to work.”
A 15% annual return compounded for 20 years turns $100k into $1.6 million. You don’t need to take excessive risks to build wealth—you need to be consistent and survive the drawdowns.
Related Resources #
For detailed implementation of these strategies:
- 📊 Iron Condor Strategy Guide - Complete IC implementation
- 📋 Iron Condor Entry Checklist - Trade criteria
- 💰 CSP Strategy Guide - Cash Secured Puts deep dive
- 📄 CSP Workflow Guide - CSP daily workflow
Disclaimer: This is educational content based on my personal experience, research, and backtested data. Options trading involves significant risk and is not suitable for all investors. Past performance does not guarantee future results. The historical data cited is from public sources but involves assumptions and may not reflect actual trading conditions. Always do your own research and consider consulting a financial advisor.
Sources: