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.

Combining Momentum and Put Selling


The CBOE PUT write index has caught a lot of attention in recent years, as it historically has produced higher risk-adjusted and absolute returns than the underlying S&P 500 index. Risk adjusted returns take into account both returns and volatility. CBOE describes the index as following:

"The CBOE S&P 500® PutWrite Index (ticker symbol “PUT”) tracks the value of a passive investment strategy (“CBOE S&P 500 Collateralized Put Strategy”) which consists of overlaying S&P 500 (SPM) short put options over a money market account invested in one- and three-months Treasury bills. The SPX puts are struck at-the-money and are sold on a monthly basis, usually on the 3rd Friday of the month. This is called the “roll date” and it matches the date of S&P 500 option expirations."

 

Here is the performance of PUT (Portfolio 1) vs. VFINX (Vanguard S&P 500 Index Fund) from 1990-2016:

 

1.png

2.png

 

The most attractive part of PUT vs. VFINX is the improvement in risk-adjusted returns. Both volatility and maximum drawdown were cut by about a third, resulting in a nice increase in Sharpe Ratio. Even the most passive investors could benefit from this approach as the PUT methodology is now available in an ETF structure from Wisdom Tree. More active investors that follow our Steady Options content may be interested in replicating PUT themselves, saving themselves the 0.38% management fee. In addition to saving on management fees, an active investor with a creative mind can potentially further increase potential returns by keeping collateral in something other than T-bills.

 

Momentum

 

What if we add a trend-following, or "time-series momentum" overlay to PUT? We already know that it has been peer reviewed and validated out of sample on multiple underlyings, so why would PUT be any different? Answer: It's not. 

 

Below is the performance of all three: VFINX, PUT (Equal Weight Portfolio), and PUT with a 12 month time series momentum filter where we are invested in PUT when its rolling 12 month excess return is positive, otherwise VBMFX (Timing Portfolio). The timing portfolio reallocation period is monthly.

 

3.png

4.png

All charts and statistics were custom generated at www.portfoliovisualizer.com

 

As expected, adding time-series momentum cuts off a substantial part of the left-tail of returns. This benefit can't be emphasized enough in the real world of human emotion. Sophisticated traders and investors like those following all of our content at Steady Options could benefit from this approach as part of their long-term portfolio. In our firm, we already utilize a variation of this strategy for our clients.

 

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

  • Can Assignment Cause Margin Call?

    I've had three emails in the past month on people being assigned on positions and receiving margin calls, and generally not knowing what happened. I advise everyone to completely research and become familiar with the exercise/assignment aspect of option trading. If you don't you can find your entire account blown out over a weekend.

    By cwelsh,

    • 6 comments
    • 5,095 views
  • Calculating ROI on Credit Spreads

    The trigger to this article was a discussion I had with someone on Reddit. There is a common misconception about calculating gains on trades that require margin, like credit spreads and short options (naked puts/calls, strangles or straddles). I believe it is important to explain how to do it properly.

    By Kim,

    • 0 comments
    • 434 views
  • Learning to Win by Learning to Lose

    It does not matter how good your trading system is - you will not win 100% of the time! A fact! The way you deal with this fact will go a long way toward determining how big a winner you become. In fact, after so many years spent in the financial arena, I have absolutely no doubts in my  mind that one of the most essential keys to winning is learning how to lose.

    By Kim,

    • 0 comments
    • 325 views
  • Should You Leg Into Iron Condor?

    The wings of an iron condor options trading strategy consist of two vertical credit spreads; i.e., a bull put spread and a bear call spread. The process of "Legging In" offers the promise of higher yields and enhanced probabilities of options trade success, but the question is whether it is worth the risk.

    By Kim,

    • 0 comments
    • 2,154 views
  • Should You Add to a Losing Trade?

    I'm sure most traders are familiar with this situation. You find a good setup, watch it for a while, then enter a trade, and it goes down right after you entered. Should you double down and add to your losing trade, or should you cut the loss and exit? That depends who you ask.

    By Kim,

    • 0 comments
    • 1,457 views
  • Top 5 Options Trading Myths

    There are a lot of myths and misconceptions about options trading. Many traders refrain from trading options because they consider it too risky. The only dangerous part of options trading is the risk-insensitive trader who buys and sells options with little or no understanding of just what can go wrong.

    By Kim,

    • 0 comments
    • 669 views
  • Selling Strangles Prior to Earnings

    Question from a reader: What is your opinion on a short strangle vs a short straddle? I understand the same unlimited risk will be there because you are trading naked options. I found that one strategy I have had some success with in paper trading is using short strangles around earnings to take advantage of large drops in volatility.

    By MarkWolfinger,

    • 1 comment
    • 522 views
  • 10 Fatal Mistakes Traders Make

    Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

    By Kim,

    • 0 comments
    • 1,580 views
  • Why Delta Dollars 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 Kim,

    • 1 comment
    • 1,348 views
  • How We Nailed The Implied Volatility Game

    Oracle (ORCL) has been following a similar pattern in the last few years. They announce their earnings date on the first week of the third month of the quarter and report during the third week of the month. Yet many times the options market "assumes" earnings during the fourth week and under-prices the third week options.

    By Kim,

    • 6 comments
    • 2,540 views



We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   You have pasted content with formatting.   Remove formatting

  Only 75 emoticons maximum are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

Loading...