SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

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

A Global Equity Put Write Portfolio


Many that sell equity market put options focus on the S&P 500 (SPX, XSP, SPY). Some will add small caps by selling puts on the Russell 2000 (RUT, IWM). An investor could also make their put selling strategy globally diversified by adding MSCI EAFE (EFA) and Emerging Markets (EEM).

The same diversification benefits that would apply to owning the equities outright via ETF's should transfer over to put writing, and all of these products have a highly liquid options market. 

In this post, we'll look at a simple backtest that includes SPY, IWM, EFA, and EEM from 2007-2018. The weights and parameters will be as follows:

 

SPY: 30%

IWM: 20%

EFA: 37.5%

EEM: 12.5%

 

This roughly correlates with current global cap weighting, with an overweight to small cap in the US. The put selling parameters are simple as well: 30 DTE entry, held until expiration, selling the strike closest to 50 delta (roughly at the money). Results are net of transaction cost assumptions for both commissions and slippage, and options are assumed to be fully collateralized with 1 Month US T-Bills. Option backtests were done with the ORATS Wheel, which comes with a free trial. It's a great tool that I highly recommend for those interested in backtesting option strategies, which otherwise can be quite a challenge. I then uploaded the data to Portfolio Visualizer to be able to simulate a portfolio inclusive of T-bill collateral yield. 

 

Hypothetical Results: (Portfolio 1 represents our put write portfolio. Portfolio 2 represents holding the ETF's directly in the same weights, with monthly rebalancing):

 

662751242_globalputs.thumb.png.dea9455c0e371521e7aee3484277a622.png

Results are hypothetical, and do not represent performance that any investor actually attained. Past performance doesn't guarantee future results.

 

During this 12 year period we see a nice improvement in risk-adjusted returns with our put write portfolio relative to owning the ETF's directly. A shallower drawdown during the 2007-2009 GFC, roughly 35% less portfolio volatility, and even a slight overall improvement in total return. During a tough 2018, the put write portfolio would have been down about half as much as the ETF portfolio (-5.5% vs. -10.6%). This outcome is similar to what can generally be seen when studying CBOE's PUT (S&P 500 put write) and PUTR (Russell 2000 put write) historical index data which extends back much further. For example, PUT historical data starts in 1986, allowing investors to analyze over 3 decades of hypothetical put writing performance. 

 

Conclusion

 

Options are an incredibly versatile asset that can be used to strengthen an overall portfolio in many ways. The volatility risk premium, which largely explains the positive performance of put writing, is not something we should expect to go away for the same reasons we don't expect the equity risk premium to go away.  Both can be thought of as having an intuitive risk-based explanation.  Retail and professional traders could likely improve their long term equity allocations by incorporating put writing into their investment process.     

 

 

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 manages the Steady Momentum service, and regularly incorporates options into client portfolios. 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Tax Efficient Trading Part II: Capital Gains Deferral

    In part I I illustrated how the preferential tax treatment of 1256 contracts could improve after tax returns of a PutWrite strategy over a long period of time. In this article, I’ll continue the illustration by switching from a PutWrite to an ETF BuyWrite (covered calls) strategy while holding pre-tax expected returns constant at 8%.

    By Jesse,

    • 0 comments
    • 595 views
  • Tax Efficient Trading Part I: The 1256 Contracts

    Cash settled index options like SPX, XSP, RUT and a few others receive special federal tax treatment where 60% of the gains are reported as a Long Term Capital Gain (LTCG) even if the contract was held for less than a year.

    By Jesse,

    • 0 comments
    • 535 views
  • SPY Short Puts vs. Put Spreads

    In this article I’ll be using the ORATS Wheel backtesting tool to compare the performance since 2007 of SPY short puts versus short put spreads. I’ll look at both risk and returns, and different ways of determining position size to adjust for the differences in risk between the two trades.

    By Jesse,

    • 1 comment
    • 1,197 views
  • Signs that you Are Ready to Start Investing

    If you want to build your wealth, you have to make sure that you invest your money. If you put money into a savings account and don’t earn any interest from it, this won’t work for you in the long term. Your money will lose value because of inflation, and this is the last thing that you need. So when do you invest?

    By Kim,

    • 0 comments
    • 718 views
  • One Year of Diversified leveraged Anchor

    I almost hate to keep saying it, but the Diversified Leveraged Anchor strategy keeps exceeding expectations and performing as designed. To remind our readers, Diversified Leveraged Anchor was created in April 2020 attempting to further increase performance, reduce risk, and to reduce volatility. 

    By cwelsh,

    • 5 comments
    • 1,658 views
  • Should I Pay Off My Mortgage Early Or Invest?

    Paying off a home mortgage early is a popular financial goal. Most people feel a level financial peace when their home is paid off that is beneficial in many ways. The most common approach to paying off the mortgage early is directly making additional principal payments to the lender on a regular basis.

    By Jesse,

    • 0 comments
    • 736 views
  • Option Order Execution Tips

    As a community of option traders, we all can relate to the occasional challenges of order execution. Best practices for avoiding errors as well as techniques for better potential execution will be the focus of this article.  Like countless others in the Steady Options community, I personally have traded thousands of option contracts over the last decade.

    By Jesse,

    • 17 comments
    • 2,280 views
  • What Trading Can Offer To A Newcomer

    For any first-time investor, one of the most important questions to ask is “why are you doing this?”. Getting into investment can be thrilling and open up new worlds for you, but it can also be draining both physically and emotionally, with long days and sudden market moves always a genuine risk.

    By Kim,

    • 0 comments
    • 945 views
  • Updated: The Performance Gap Between Large Growth and Small Value Stocks

    Eight months ago on July 21st 2020 I posted an article, The Performance Gap Between Large Growth and Small Value Stocks. Over the long-term small cap value stocks have outperformed large cap growth stocks, although not over more recent history.

    By Jesse,

    • 0 comments
    • 1,511 views
  • 6 Ways to Invest Your Money That Aren't Cash Savings

    It’s always a good idea to keep some of your money in cash so if there is an emergency and you need money in a hurry, you can access it without having to worry. However, cash savings are not your only option if you have money left over at the end of the month, and there are a lot of other options that could bring greater returns.

    By Kim,

    • 0 comments
    • 1,140 views

  Report Article

We want to hear from you!


There are no comments to display.



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 Expertido