Comparison of Option Selling Strategy vs. Passive Investing in the S&P 500 – Which One Is Better?

Comparison of Option Selling Strategy vs. Passive Investing in the

Who wins in the long run?

In recent years, we’ve seen a growing trend — perhaps even one that’s starting to get a little out of hand: the widespread recommendation of passive investing in the main U.S. index, the S&P 500.

Now, investing is definitely a good thing — better to invest passively than not at all, and better to put your money in the S&P than chase growth stocks based on tabloid tips.

But wouldn’t it be even better to educate yourself a bit more and understand the range of investment instruments available?

Let’s take a closer look.

The option selling strategy — that is, selling options without simultaneously buying them - still carries a reputation among investors as a kind of “gamble” or an approach meant only for more experienced traders. And that’s the best-case scenario - in most cases, people know very little about this strategy, or nothing at all.

I often repeat that the narrative of risk around option selling is systematically pushed onto retail traders - to provide “fuel” for institutions. Think about it: if it’s true that most retail traders lose money trading options, then there must be an equally large group consistently profiting. After all, an option is a strictly two-sided contract.

And no amount of arguing that an option can be bought and sold multiple times before expiration - potentially generating profits for more than two parties - changes the fundamental fact: in the end, there are always just two sides - the seller and the buyer. One of them will lose.

Let’s return to the core of this article:

Is there any hard data to support the claim that option selling is one of the most consistently profitable long-term strategies?

Not only academic studies, but also real historical data and long-term backtests show that option selling, when done systematically and with strong discipline, can deliver not only above-average returns, but also lower volatility and a more stable portfolio performance compared to simply holding stocks.

Let’s take a look at specific sources that demonstrate the profitability of option-selling strategies, and at the same time compare option selling to the now wildly popular passive investing in the S&P 500 index.

The results might surprise even those who consider themselves strong advocates of the passive approach.

1. CBOE Indexes as Evidence of Profitability

The Chicago Board Options Exchange (CBOE) has created several indexes that simulate the long-term performance of options strategies. The most well-known include:

• BXM (BuyWrite Index) – models a covered call strategy, i.e., holding S&P 500 stocks while regularly selling monthly call options on them.

• PUT (PutWrite Index) – simulates the systematic selling of put options on the S&P 500 index, without holding the underlying stocks.

According to official data, between 1986 and 2020, the PUT Index achieved an average annual return of approximately 9.7%, while the S&P 500 delivered 9.2%.

At first glance, this may seem like a small difference. But…

Annual return	10Y	15Y	20Y
9,2 %	141 %	276 %	497 %
9,7 %	153 %	312 %	578 %

Even a small difference in annual returns can, over ten or twenty years, turn into a significantly larger cumulative gain.

You might point out that both CBOE indexes are only model-based indexes — and you’d be right, but only partially.

That’s because their values are calculated using clearly defined, fixed rules, and by following those same rules in practice, you can achieve a similar outcome.

2. What Does Academic Research Say?

In a 2015 study titled The Profitability of Option Trading Strategies, author Wei Su compared 12 different option strategies.

The results were clear: the short put strategy ranked among the most profitable in terms of Sharpe ratio, meaning it delivered high returns adjusted for volatility.

What Is the Sharpe Ratio?

The Sharpe ratio is a metric that shows how much return an investor earns per unit of risk taken. In other words: the higher the Sharpe ratio, the more efficiently the strategy rewards the investor for the volatility (risk) incurred.

The Sharpe ratio is calculated as: (Average return – Risk-free rate) / Standard deviation of returns

For example, if two strategies both generate 10% annually, but one of them is significantly less volatile, it will have a higher Sharpe ratio — and therefore a better risk-to-return profile.

Wei Su’s study didn’t just evaluate how much the strategies earn, but also how stable and predictable those returns are. And that’s precisely what matters most for a long-term investor.

The study also confirms what many experienced options traders intuitively understand — that the options market offers a systematic premium that can be consistently captured over time.

3. Volatility Risk Premium: Profiting from Fear

One of the main reasons why option selling strategies work is due to what’s known as the volatility risk premium.

In practice, this means that options are often “overpriced” relative to the actual probability of being exercised. Why?

Because many investors buy options not to speculate, but to hedge — in other words, as insurance against market downturns.

And like any other insurance, there’s a premium to be paid for peace of mind. This is one of the key reasons why these strategies continue to work over time.

Those who sell these options are essentially collecting that fear premium — doing so repeatedly, systematically, and often across a broad range of underlying assets.

Studies such as Carr & Wu (2009) and Barber & Odean have empirically confirmed the existence of this premium.

The greatest advantage is that this is not a random anomaly — it’s a structural feature of the options market that repeats itself over time.

4. Practical Tests and Data: TastyTrade & ThinkOrSwim

Platforms like TastyTrade and ThinkOrSwim (which share co-founder Tom Sosnoff) offer hundreds of hours of backtests and educational videos focused specifically on option selling.

Whether it’s a simple short put, a more complex iron condor, or a delta-neutral short strangle, the findings are surprisingly consistent:

• Selling options with a delta between 16 and 30 has a high probability of profit (typically 70–85%).

• Closing positions at 50% of maximum profit significantly improves overall performance.

• Diversifying across multiple tickers and sectors helps reduce volatility and limits the risk of extreme losses.

5. Classic Options Literature: McMillan and His Approach

If there’s one book that every serious options trader should know, it’s undoubtedly Options as a Strategic Investment by Lawrence G. McMillan.

This “bible of options trading” includes not only dozens of strategies, but also their applications in different market conditions, along with practical recommendations for option selling. (A summary of these strategies can also be found in our Options Glossary.)

McMillan emphasizes that option selling should not be viewed as a risky bet on declining volatility, but rather as a systematic way to capitalize on statistically favorable market setups.

And now we arrive at the core question posed in the title of this blog:

6. Option Selling vs. Passive Investing in the S&P 500

In recent years, passive investing in index funds (such as ETFs tracking the S&P 500) has gained tremendous popularity — and for good reason.

Low costs, diversification, and simplicity make it a smart choice for most beginner investors.

But what if the indexes are overvalued, stretched, and end up moving sideways for the next decade? What if they correct?

But what if there’s a strategy that can generate higher long-term returns with lower volatility?

That’s exactly the case with option selling — especially strategies like short puts or covered calls, which take advantage of the structural market edge we discussed earlier.

While the passive investor waits for the market to rise, the option seller earns profits even during sideways or slightly declining markets — because if the options expire worthless, the premium stays with the seller.

This gives option-selling strategies an advantage in sideways markets, during periods of high volatility or uncertainty - and even the strong bull years like 2022 and 2023 have once again proven that option-selling strategies can outperform the S&P 500, even in rising markets.

Moreover, option selling doesn’t necessarily conflict with the idea of passive investing. If the selling is done automatically (e.g., selling options on an ETF each month), it can become a nearly “mechanical” strategy with minimal time commitment — much like passive index investing.

The difference is that trading options requires significantly more knowledge than simply clicking the Buy button when investing in indexes or stocks.

So who wins?

• S&P 500 – offers simplicity through recurring purchases, long-term growth, but also full exposure to market downturns.

• Option Selling – provides more stable returns, profit potential even in sideways or slightly declining markets, and while it carries the risk of larger drawdowns, it also offers the possibility of faster recovery compared to pure stock or index positions. It also opens the door to advanced strategies that adapt to various market conditions.

So, option selling isn’t a replacement for passive investing - it’s a variant, or better yet, an extension of it.

For the investor who’s willing to gain a deeper understanding of how the market works, option selling becomes a strategic tool that can give the portfolio a performance edge over the traditional index-based passive investing approach.

Věděli jste před přečtením tohoto článku něco o výpisech opcí? Did you know anything about option selling before reading this article?

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