You would be shocked to know how many accepted “facts” in the financial world are simply not true. 

For example, you may have been told that asset allocation — the amount of your portfolio you dedicate to stocks, bonds, etc. — is more important to your future returns than stock selection.

This widely cited idea comes from a grossly misinterpreted study that suggests “more than 91.5% of a portfolio’s return is attributable to its mix of asset classes. In this study, individual stock selection and market timing accounted for less than 7% of a diversified portfolio’s return.”

The statistic is attributed to a 1986 paper published in the Financial Analysts Journal called “Determinants of Portfolio Performance,” written by Gary P. Brinson, CFA, Randolph Hood, and Gilbert L. Beebower. It is commonly referred to as the BHB study.

Read that way, the study is basically telling us stock picking is a waste of time since we can only squeeze a small amount of performance out of the stock selection process. If you read the paper closely, however, the authors actually said something different. BHB studied the variation of a portfolio’s quarterly returns.

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I don’t know where the misinterpretation started, but over the next decade, the inaccuracy became accepted as truth. In 1998, another study found that 49 of 50 citations of the BHB study in academic papers were inaccurate.

Because conventional wisdom can be wrong, I always do my own research. I test ideas rather than eyeball charts and make general assumptions.

Another huge misunderstanding hits a bit closer to home for me. Perhaps you’ve heard that 75% or more of options expire worthless. That would be bad news for options buyers, but great news for option sellers.

Selling put options is my preferred trading strategy. If you’re unfamiliar with put selling, you can check out the eight-minute tutorial I’ve put together. 

In a nutshell, selling a put obligates you to purchase the underlying stock from the put buyer at the option’s strike price if it falls below that level before the option expires. For accepting that obligation, you receive instant income upfront. That money is yours to keep as long as the stock does not fall below the specified price within the life of the put option.

If three out of every four options expire worthless, you might be thinking selling puts is like shooting fish in a barrel. But that couldn’t be further from the truth.

This misconception that 75% of options expire worthless is rooted in a study that reviewed options on various futures contracts for a three-year period (1997-1999) held to expiration on the Chicago Mercantile Exchange (CME). The authors did find that more than three out of four options, on average, expire worthless. It is misleading, though, because it does not include contracts closed prior to expiration. 

I conducted my own research, which I submitted to the Market Technicians Association (MTA). From that paper:

“According to the widely quoted study, 6.3 million option contracts expired worthless in 1999. According to CME data, 115 million options contracts were traded that year. Most options contracts are closed prior to expiration and because there is a buyer and seller for each contract, half of those were closed with a gain and half of the options traders closed positions with a loss. Of all contracts traded, just 5.5% expired worthless that year.”

If so few puts expire worthless, this means that selling put options may be one of the most difficult strategies to implement successfully. So you might be wondering why it is also my favorite. And the answer is simple: Because I have found a system that works.

Since I began my Income Trader service in February 2013, we have closed 93 put trades and 83 (89%) have been worthless or trading for less than $0.03 when we closed the position, meaning we kept all or the lion’s share of the profits.

Let’s walk through a quick example of an actual trade on AmTrust Financial Services (NASDAQ: AFSI). In mid-December, I recommended my readers sell the January $45 puts, and they collected $58 per contract, which controls 100 shares. This meant that if AFSI, which was trading around $57 at the time, fell below $45, we would be obligated to purchase shares at that price.

Buying 100 shares of AFSI at $45 each would cost $4,500, and brokers require traders put aside a portion of that amount, sort of like a down payment on a house. This is called a “margin requirement,” and it typically runs about 20% of the amount it would cost to buy the shares. The AFSI trade required a margin deposit of $900 (20% of $4,500).

AFSI remained well above $45 a share through Jan. 16, when the options expired. We pocketed the $58 per contract for a return of 6.4% over the $900 margin requirement. Since the trade was only open for 30 days, our annual return was actually 78.4%. This was my fourth successful trade on AFSI, and each time, all readers had to do was sit back and collect the cash. 

Selling options is an incredibly lucrative strategy — when done right. In fact, Brad C. from Memphis, Tenn., said he made over $1 million last year following my recommendations. All in all, I’ve closed 85 winning trades in a row. And considering that less than 6% of put options expire worthless, these results are outstanding and prove just how valuable my system is.

If you’d like to learn more about how it works or get my trades sent directly to your inbox each week, follow this link.

This article originally appeared on ProfitableTrading.com: Beware of This Common Income Trading Fallacy​