SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

A Case Study in SPX Put Writing


I've written about writing naked puts on multiple occasions, as I find it to be an attractive way to gain long exposure to the underlying asset class. It doesn't have to be a decision of one vs. the other (meaning, is it better to sell puts or own the underlying asset directly?), as there are advantages and disadvantages to both.

And the same is true with determining which strikes to use when selling puts. As it turns out, over a relatively long period of time risk and reward are related, as we would expect. 

Below are the results of three backtests simulating the monthly sale of SPX put options from 2001-2017 at various delta levels (16, 30, and 50). Each test assumes you enter approximately one month from expiration and exit approximately 3 days prior to expiration (results have minimal variation if entries and exits are slightly modified). No active trade management is involved.

My tests also assume no leverage is being used, with cash fully secured by 1 month T-bills. In other words, the returns of put selling can be thought of as the yield on cash plus the net results of the option trades. No commissions, slippage, or taxes are included, so real results would be slightly lower. Given the size of the SPX contract and its liquidity, this isn't a serious issue. The strategy passes the test of real world investability.

 

Click on the image for greater clarity

Picture1.png

 

Several interesting observations can be seen:

 

1. All strikes deliver returns similar to the underlying asset (using SPY as a proxy). The at the money strike (50 delta) even slightly outperformed SPY. It should be noted that every backtest is sensitive to the start and end point, and if we started our test in 2009 SPY would substantially outperform. This is what we would expect given the limited profit potential of put selling. CBOE has data going back to 1986 showing that at the money put writing has delivered returns comparable to owning the underlying.

 

2. All strikes delivered less risk than the underlying asset, measured with standard deviation and max drawdown. This results in higher Sharpe Ratios. The Sharpe Ratio is one way to measure how well we are being compensated for the risk taken, and a higher number is better. Put selling having lower risk than owning the underlying asset is something that we can expect to persist in the future. This is often counter to the perception that many have about selling options being "risky". Leverage is what creates risk, not product/strategy. 

 

3. The farther out of the money strikes deliver higher Sharpe Ratio's, with 16 delta options producing an extremely high 0.92 Sharpe. This could be noise in the data that may not be likely to continue out of sample, but many other researchers have found similar results on additional data and underlying assets leading us to believe it's not random. Those who believed this will continue to persist may choose to modestly lever their notional exposure to produce higher returns instead of selling strikes that are closer to the money. 

 

4. If you look closely at the chart, you can see that put selling can make money even in a declining market (especially with further out of the money options, of course). For example, during the 2001-2002 bear market, 16 delta put selling was continuing to put in new equity highs. This was also the case during the first several months of 2008 where the market was declining, but not too far/too fast. When the crisis hit in the fourth quarter, the speed and magnitude of stock market losses was too great for any of the strikes to endure. No surprise there, as insurance must pay off from time to time to attract buyers. 

 

5. After a crisis period like 2008, put selling recovered quickly as option premiums were substantial. SPY didn't reach a new high until 2013, while put selling recovered it's drawdowns in 2010. This is important given the nature of our human discomfort with losses and our ability to stick with a strategy. 

 

You may even draw additional conclusions of your own from this data. So with all this being said, which strike should you sell? I don't think a binary decision needs to be made here anymore than a binary decision on if you should sell puts or just buy the ETF directly. There are advantages and disadvantages of both, but hopefully this has made it clear that put selling is worthy of at least a partial allocation for a particular asset class like US large cap equity. 

Below I'll present one additional chart that is 50% SPY, and 50% put selling with equal allocation to our three strike levels (in other words, about 16.66% each), rebalanced monthly. Given the certainty of our uncertainty about which method will be best in the future, as well as the simplicity and tax efficiency of a traditional ETF allocation, this approach could be ideal for many sophisticated investors.

 

Click on the image for greater clarity

Picture2.png

 

Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse oversees the LC Diversified forum and contributes to the Steady Condors newsletter. 

What Is SteadyOptions?

12 Years CAGR of 123.5%

Full Trading Plan

Complete Portfolio Approach

Real-time trade sharing: entry, exit, and adjustments

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe to SteadyOptions now and experience the full power of options trading!
Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • The Sell Put And Buy Call Strategy | A Synthetic Long Stock

    The Sell Put And Buy Call Strategy is an example of a synthetic stock options strategy: using call and puts options to mimic the performance of a position, usually involving the purchase of a stock. We saw this when looking at the synthetic covered call strategy elsewhere.

    By Chris Young,

    • 0 comments
    • 57,373 views
  • Long Straddle Option Strategy: The Ultimate Guide

    Straddle Options Definition
    An options straddle strategy is buying (or selling) both a put and call option with the same strike price and expiration date for the same underlying asset, and paying both the put and call premiums.

    By Pat Crawley,

    • 0 comments
    • 57,881 views
  • 7 Helpful Tips To Invest Your Money And Time In 2025

    While many of us would like to not think too much about how much money controls the world, it certainly is a primary motivator for most people in life. Whether you earn to pay the bills or work to succeed in a career you’re passionate about, money is something that can help greatly in making your life more comfortable and enjoyable.

    By Kim,

    • 0 comments
    • 33,500 views
  • Gamma Scalping Options Trading Strategy

    Gamma scalping is a sophisticated options trading strategy primarily employed by institutions and hedge funds for managing portfolio risk and large positions in equities and futures. As a complex technique, it is particularly suitable for experienced traders seeking to capitalize on market movements, whether up or down, as they occur in real-time.

    By Chris Young,

    • 0 comments
    • 24,463 views
  • Short Gamma vs. Long Gamma in Options Trading

    Gamma is one of the primary Options Greeks, which measure an option's sensitivity to specific factors that could affect an option price. Despite traders hyping up several different Greeks and second-order Greeks like "Vanna" and "charm," there are only four primary Greeks that you need to be familiar with to understand options trading.

     

    By Pat Crawley,

    • 0 comments
    • 39,992 views
  • Predicting Probabilities in Options Trading: A Deep Dive into Advanced Methods

    In options trading, the focus should not be on predicting the exact closing price of a ticker on a given date - a near-impossible task given the pseudo-random nature of markets. Instead, we aim to estimate probabilities: the likelihood of a ticker being above a specific value at a certain point in time. This perspective turns trading into a probabilistic exercise, leveraging historical data to make informed decisions.

    By Romuald,

    • 1 comment
    • 10,823 views
  • SteadyOptions 2024 - Year in Review

    2024 marks our 13th year as a public trading service. We closed 136 winners out of 187 trades (72.7% winning ratio). Our model portfolio produced 116.7% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month (of 0.6% loss) in 2024. 

    By Kim,

    • 0 comments
    • 2,628 views
  • The Options Wheel Strategy: Wheel Trade Explained

    The “wheel” trade is variously described as a beginner’s strategy, a combination to exploit features of both calls and puts, and as “perfect” solution to the well-known risks of shorting calls, even when covered. The options wheel strategy is an income-generating options trading strategy that both beginners and experienced traders can leverage for profit.

    By Pat Crawley,

    • 0 comments
    • 63,040 views
  • Why Dollar Delta Will Change Your Trading

    Delta is one of the four main option Greeks, and any serious trader needs to have a thorough understanding of this greek if they hope to have any chance of success in the trading options. If you’re a beginner, you can visit my blog to learn more about understanding option delta

    By GavinMcMaster,

    • 0 comments
    • 32,177 views
  • The 7 Most Popular Cryptocurrencies Right Now

    There are thought to be 20,000 cryptocurrencies currently in existence. While a lot of these are inactive or discontinued, a lot of them are still being traded on a daily basis. But just which cryptocurrencies are most popular? This post takes a look at the top 7 most traded cryptocurrencies.

    By Kim,

    • 0 comments
    • 9,057 views

  Report Article

We want to hear from you!


Its funny how many different opinions there are on put-writes on SPX.   If you look at the Wisdom Tree PUTW etf it has not held up so well since its launch a few years ago (granted we have been in a bull market until recently).  I also came across some scholarly articles bashing the CBOE indexes and claiming under-performance vs. SPX since they were first published.

 

Today I read this: https://seekingalpha.com/article/4210320-selling-puts-good-bad-ugly which seems to advocate selling puts on the weeklies but if the underlying moves down, do not lower your strike and hold the same strike until price returns (which could be years).  

 

What do you think about adding some trend filters?  For example, when SPX is below 200 sma use the 16 delta and when above the 200 day sma use 50 delta or just hold the underlying?  

 

Share this comment


Link to comment
Share on other sites
23 hours ago, FrankTheTank said:

Its funny how many different opinions there are on put-writes on SPX.   If you look at the Wisdom Tree PUTW etf it has not held up so well since its launch a few years ago (granted we have been in a bull market until recently).  I also came across some scholarly articles bashing the CBOE indexes and claiming under-performance vs. SPX since they were first published.

 

Today I read this: https://seekingalpha.com/article/4210320-selling-puts-good-bad-ugly which seems to advocate selling puts on the weeklies but if the underlying moves down, do not lower your strike and hold the same strike until price returns (which could be years).  

 

What do you think about adding some trend filters?  For example, when SPX is below 200 sma use the 16 delta and when above the 200 day sma use 50 delta or just hold the underlying?  

 

 

I wrote about adding trend to put selling in Feb 2017, you can read the article HERE

Share this comment


Link to comment
Share on other sites
1 minute ago, Jesse said:

 

I wrote about adding trend to put selling in Feb 2017, you can read the article HERE

I think I am you but 10 years in the past.   Almost every idea I have I found you already have a post and research on it.

How does the future look?  :)  

Edited by FrankTheTank

Share this comment


Link to comment
Share on other sites
2 minutes ago, FrankTheTank said:

I think I am you but 10 years in the past.   Almost every idea I have I found you already have a post and research on it.

How does the future look?  :)  

 

I feel that way about others in finance as well! I'm confident that the future for basic put selling will be good because the basic intuition of a sustainable risk premium is pretty solid. Sellers are taking on the risk that other market participants are looking to insure, and in an efficient market, that produces a positive expected return over time for the seller. I think the ideal approach is to diversify that risk across symbols, strikes, and expirations as much as is reasonably possible. 

Share this comment


Link to comment
Share on other sites


Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs