214  •   The Intelligent Option Investor
from a portfolio of short puts with the yield I might generate from a cor -
porate bond portfolio. With this consideration, and keeping in mind that 
these investments are unlevered, 2 the name of the game is to generate as 
high a percentage return as possible over the investing time horizon while 
minimizing the amount of real downside risk you are accepting.
T enor Selection
To maximize percentage return, in general, it is better to sell options with 
relatively short-term expirations (usually tenors of from three to nine 
months before expiration). This is just the other side of the coin of the 
rule to buy long-tenor options: the longer the time to expiration, the less 
time value there is on a per-day basis. The rule to sell shorter-tenor options 
implies that you will make a higher absolute return by chaining together 
two back-to-back 6-month short puts than you would by selling a single 
12-month option at the beginning of the period.
During normal market conditions, selling shorter-tenor options is 
the best tactical choice, but during large market downdrafts, when there 
is terror in the marketplace and implied volatilities increase enormously 
for options on all companies, you might be able to make more by sell-
ing a longer-tenor option than by chaining together a series of shorter-
tenor ones (because, presumably, the implied volatilities of options will 
drop as the market stabilizes, and this drop means that you will make 
less money on subsequent put sales). At these times of extreme market 
stress, there are situations where you can find short-put opportunities 
on long-tenor options that defy economic logic and should be invested 
in opportunistically. 
For example, during the terrible market drops in 2009, I found a 
company whose slightly ITM put long-term equity anticipation securities 
(LEAPS) were trading at such a high price that the effective buy price of 
the stock was less than the amount of cash the firm had on its balance 
sheet. Obviously, for a firm producing positive cash flows, the stock should 
not trade at less than the value of cash presently on the balance sheet! I ef-
fectively got the chance to buy a firm with $6 of cash on the balance sheet 
and the near certainty of generating about $2 more over the economic life 
of the options for $5.50. The opportunity to buy $6–$8 worth of cash for