I don’t know if AI is trying to placate me or if we think in the same way but it is satisfying that it is validating my trading strategy even though it sometimes has better ways to execute it.
To that end, I’ve been investing a great deal in IWM for a while now, the earliest post I could find on this blog goes back to this post on August 2024. IWM was trading at $208 back then and I was executing covered calls on IWM until I switched to net credit collars most recently.
Out of curiosity I decided to download all the IWM data from 2000 thru 2026 and ask AI what options trading strategy would work best with the data set.
AI Response On How To Maximize Options Trades On IWM:
I ran a simple month-by-month backtest on your file iwm_daily_historical-data-01-22-2026.csv (daily closes from 2000-05-30 through 2026-01-21).
Because the dataset only has prices (not actual option chains / implied vols), I had to model option prices to compare strategies:
Assumptions used (so the comparison is apples-to-apples)
- Rolled monthly: initiate on each month’s last trading close, “expire” on next month’s last trading close.
- Pricing model: Black–Scholes with
- σ = trailing 21-trading-day realized vol (annualized)
- r = 2% constant risk-free rate
- Strikes:
- ATM strike = spot
- OTM strikes = ±5% (puts at 0.95×S, calls at 1.05×S)
- No dividends, no early assignment, no transaction costs/slippage, no vol skew.
- Returns are measured per $1 of underlying notional per month (so option-only strategies don’t get “infinite leverage” from tiny premiums).
Result: the most profitable strategy was Covered Calls
Over the full period, selling 5% OTM covered calls monthly produced the highest compounded performance in this model.
Summary (2000-06 through 2026-01 monthly rolls; 307 periods)
| Strategy | Final multiple | CAGR (annualized) | Max drawdown |
|---|---|---|---|
| Covered calls | 12.77× | 10.47% | -32.43% |
| Collars | 8.90× | 8.92% | -19.84% |
| Buy & hold (benchmark) | 5.18× | 6.64% | -53.50% |
| Bear put spreads | 0.42× | -3.37% | -63.53% |
| Straddles | 0.29× | -4.72% | -75.57% |
| Strangles | 0.25× | -5.34% | -75.50% |
Intuition (why this happens under these assumptions)
- In long samples, IWM drifted upward overall, so structurally bearish positioning (bear put spreads) tends to lose.
- Long volatility (straddles/strangles) loses if the premium you pay isn’t consistently “underpriced” versus realized movement. Using realized vol to price options already makes this friendlier to buyers than real markets (where implied vol is often higher), and they still lose here.
- Short call premium harvesting (covered calls) benefits from the market’s tendency to pay for upside convexity, while still participating in a lot of the underlying’s long-run rise.
- Collars also do well, but they spend some of the call premium on put protection, reducing upside compared to covered calls (in exchange for a much smaller drawdown).
Bottom line
Most profitable from your list (in this backtest): Covered calls
Second-best: Collars (not as high return, but materially lower drawdown).
If you want, I can rerun with different “standard” parameters (e.g., 30-delta strikes, 1–2% OTM, weekly rolls, adding realistic option overpricing vs realized vol, adding dividends/transaction costs). That can change levels, but it’s common that systematic call overwriting remains very competitive over long equity ETF histories.
My Thoughts
Did I intuitively guess right on how to invest with IWM for the past few years? Is AI trying to make me feel good? Or is it all experience and foresight? I don’t know but my trading strategy has been working for me and keeps the cash rolling.
AI continues to give me some unorthodox trades and with IWM it is showing very good foresight or prowess in recommending this trade. Shortly after this post, AI recommended I sell $280 calls and buy $260 puts on IWM. At the time, I thought it was crazy but I figured what the heck, I had already followed it’s recommendations so why not do it again.
As I type this post, IWM is now ~$270 and I didn’t think it would climb that fast from $250’s back in late December. Of course, there is still 5 more months to go before we reach expiry but I am truly impressed. My blended entry into IWM was in the low 200s and thrilled to be out at $280 in June but $260 is fine too.
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