Why a Smaller Stock Plus Option Selling Portfolio Outperformed a Larger One

Dual Edge Research publishes two powerful newsletters that work great individually — and even better together. The Bull Strangle Newsletter focuses on stocks and options, combining stock ownership with premium-selling strategies to generate consistent income and market-beating returns. The Smart Spreads Newsletter specializes in seasonal commodity futures spreads, offering a diversified approach with low correlation to equities. Together, they deliver a complete investment perspective — one focused on income, the other on diversification — all under one simple subscription.

Introduction
In last week’s article, I explored an unexpected result: a smaller portfolio consistently outperforming a larger one, despite both using the same strategy and drawing from the same watch list. At first glance, that didn’t make sense. The strategy was identical. The execution was consistent.

The only real difference was constraint—the smaller portfolio was limited to lower-priced stocks. That raised an important question:

·Was the outperformance coming from better capital efficiency—or from better trade selection?

Recent analysis provides a clear answer.

Starting With the Raw Results

Before diving into what changed, it’s important to understand the baseline. Across a dataset of 951 trade-representing the weekly watch lists published in the newsletter from mid-May 2025 through the present, the results were already strong:

Win rate: 71.1%

·Average return: 1.7% per trade

·Large loss frequency: 9.3%

It’s also important to note that these results are based on option premiums calculated using the bid price at Friday’s close, making the estimates intentionally conservative. In practice, actual fills are often more favorable. For clarity, a “large loss” is defined here as any trade with a loss greater than 20%.

By any standard, this is a highly effective strategy. A win rate above 70% with controlled drawdowns is exactly what income-focused traders are trying to achieve. But as strong as these results are, they are not uniform.

Price and Volatility Are Not Neutral Inputs

Two variables consistently shaped outcomes across the dataset: stock price and implied volatility. At first glance, both appear to be simple inputs—filters used to narrow a watch list. But the data shows they are far more important than that. They define how trades behave.

When grouped by stock price, performance did not move in a straight line. Instead, it clustered in distinct ranges. Stronger results consistently appeared in stocks priced between $10 and $40, as well as in a second range between $65 and $100. These trades produced higher win rates, stronger returns, and more controlled drawdowns.

In contrast, stocks in the $45-$65 range behaved differently. Returns compressed, win rates declined, and large losses became more frequent. At the extremes, additional instability appeared—very low-priced stocks introduced inconsistency, while higher-priced stocks showed wider dispersion and less predictable outcomes.

Implied volatility followed a similar pattern. Rather than improving steadily with a higher premium, volatility separated into distinct regimes. Trades performed best in the 25%–45% range, where outcomes were stable and consistent, and again in the 60%–85% range, where returns improved, but variability increased.

Surprisingly, the weakest results came from the 45%–55% range. This “middle zone” produced lower returns, higher downside risk, and no meaningful improvement in win rate. At the high end, volatility above roughly 85% also degraded performance, as instability began to outweigh the premium advantage.

These are not arbitrary thresholds. They reflect how different types of stocks behave within the strategy's structure. Some combinations generate a consistent premium with controlled movement. Others introduce instability without sufficient compensation.

Where the Data Begins to Separate

Once these structural differences were identified, the next step was straightforward: remove trades that fall into historically weak combinations of price and implied volatility. No changes were made to entry, exit, or position sizing—only the selection universe was adjusted. The impact was immediate. The remaining subset (456 trades) showed:

·Win rate: 75.8%

·Average return: 3.0% per trade

·Large loss frequency: 6.8%

At the same time, the trades that were removed (495 trades) showed:

·Win rate: 66.9%

·Average return: 0.5% per trade

·Large loss frequency: 11.6%

The Critical Insight

The removed trades were not obvious failures. They still won nearly 67% of the time. But they produced minimal returns, carried higher downside risk, and reduced overall efficiency. This is what makes them dangerous. Underperformance is not driven by losing trades. It is driven by trades that win—but don’t pay.

Connecting Back to Last Week’s Finding

This is where the earlier observation becomes clear. The smaller portfolio—by design—was constrained to lower-priced stocks. That constraint unintentionally filtered out many of the weaker price-volatility combinations identified in this analysis.

The larger portfolio, with more flexibility, included a broader set of trades—including those that fall into structurally inefficient zones. That difference in selection—not capital size—drove the performance gap. The smaller portfolio wasn’t better because it was smaller. It was better because it was more selective. This analysis explains most of that discrepancy.

Final Thought

Markets offer endless opportunities. The challenge is not finding trades—it’s avoiding the ones that quietly degrade performance. What this research shows is that the edge is not always created by doing more. Often, it comes from knowing exactly what to leave out.

More Information

Now you can get two powerful newsletters — for one simple price!

• For stocks and options, the Bull Strangle Newsletter shows you how to combine stock ownership with dual option selling — a disciplined strategy that has consistently outperformed the S&P 500.
• For commodity futures, the Smart Spreads Newsletter focuses on seasonal commodity spreads — a proven, low-correlation approach that thrives in all types of markets.

Each newsletter is designed to deliver consistent income on its own — but when used together, they create a complete, diversified trading approach that works in any market environment.

Visit BullStrangle.com to subscribe for just $1 for the first month.

For a video overview of the Bull Strangle Newsletter

For a video overview of the Smart Spreads Newsletter

Darren Carlat

Dual Edge Research

(214) 636-3133

DualEdgeResearch@gamil.com

www.BullStrangle.com

Disclaimer

This information is for informational purposes only and should not be considered as investment advice. Past performance is not indicative of future results, and all investments carry inherent risk. Consult with a financial advisor before making any investment decisions.