the great compromise

An investor asked about a "...favorite investment strategy..." & "...backtesting?" 

I sell puts, then calls in my IRA against ETFs.  Currently, I'm using XLE - the energy ETF - exclusively.  (I've used DIA, SPY, EEM, EFA & TLT.)  I'm reluctant to use individual equities because I still hear footsteps as a result of once highly respected companies like Enron, Tyco, SunMicrosystems crunching investors at this century's turn.  Even Apple was painfully in the single digits back then.  With ETFs, if I get put under lousy circumstances, as I did with XLE a few months ago, at least I own a diverse mutual fund.

Backtesting?  I compare my option selling performance to the buy & hold performance of the underlying ETF.  Versus the 5 buy & hold market outcomes below, my performance is as follows, which is actually how it must be when selling options:

1. Through-the-roof with buy & hold?...as I sell puts, then calls, I generally do well but underperform.
2. Up-modestly w/ buy & hold?...I generally outperform.
3. Flat?...I generally outperform.
4. Down-modestly?...Generally outperform.
5. Into-the-tank?...I generally outperform, while still getting beat up!

Here's a good example:

• On 7/21/20, XLE was at $38.38.  I sold the XLE 8/21/20 $42 covered calls & received a $0.53 premium.  XLE closed at $37.55 on 7/27/20, down $0.83 from July 21.  Of course my XLE shares were also at $37.55 on July 27's close - down the same 83 cents - but I have the 53 cent premium in my IRA's back pocket.  A hedge against the 83 cent loss.
• A bit later on the same July 21, XLE was at $38.22.  I sold the XLE 8/21/20 $38 put & received a $1.67 premium.  If this put were assigned at 7/27/20's close, I'd pay the $38 strike price for the then $37.55 XLE, a 45 cent principal loss.  But I'd have the $1.67 in my IRA's back pocket.  While an XLE buy & hold dropped 67 cents from $38.22 to $37.55, I'd have the $1.67 premium minus the 45 cents in principal loss.  Another hedge against an XLE loss.

For me, the most frustrating buy & hold outcome to compete with is when my XLE goes through-the-roof.  My sell puts, then calls strategy generally does very well then, but not as well as buy & hold.  The great compromise of option selling!