Why an 86% win rate is not the edge

The number

Across 1,137 resolved cash-secured puts in our paper book, managed the way we would run them (close at half the premium when that order fills first, otherwise defend the position, otherwise hold), the win rate was 85.6%. The average win was +1.41% of the collateral. The average loss was -2.79%. Losses were twice the size of wins.

Do the arithmetic: at a 2 to 1 loss-to-win ratio you need roughly two wins for every loss just to break even, which is a win rate near 67%. The book cleared that easily, but the margin is what pays you, and it came out to about +0.8% a trade on collateral.

Why one or two contracts can still be a big position

Selling one contract instead of ten changes the dollars, not the shape. The shape is set by the exit rules: closing at half the credit caps a win at half the premium, while a defensive buyback of a threatened put costs a multiple of the premium. That asymmetry is built in before you choose a count.

What determines whether a loss hurts is the collateral at risk as a share of your account, and how many of your positions are really the same bet. One contract on a leveraged ETF can carry the same downside as several on the index it tracks. Our replay found worst single trades of about -26%, -9% and -9% of collateral on three leveraged wrappers, against -1.45% on the index funds.

Leveraged ETFs earn a little more and gap a lot more

In the same book, the index funds earned about 4.8% a year on collateral and the leveraged wrappers about 7.4%. That extra few percent came with single-trade losses up to about eighteen times larger. A 3x fund moves three times its index, so a strike that looks comfortably out of the money can be crossed by one bad session.

Cash in Treasury bills earned about 4% over the same period, so the honest excess return of the index puts over cash was small. The lesson is not that leveraged ETFs are forbidden, it is that the win rate hides the tail, and the tail is where the account is decided.

What it changes in practice

Judge a short premium strategy by its loss-to-win ratio and its worst trade, not by its win rate. Size by the maximum loss you would take on a gap, summed across every position that moves with the same factor, which our lesson on correlated tickers covers. And if the win rate drops from the mid 80s to the high 70s for a stretch, read it against that 2 to 1 ratio before deciding anything: the margin is thinner than the headline suggests.