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.

Equity Index Put Writing For The Long Run


One of my all-time favorite investing books is Jeremy Siegel's Stocks For The Long Run, which is currently in its 5th edition. It's a true classic that I refer back to often.  Professor Siegel lays out the compelling case for equities over extended time horizons such as 20 or 30 years.

Yet as compelling as equities may be over the long run, professeor Siegel notes that "fear has a greater grasp on human action than does the impressive weight of historical evidence." We believe the attractive characteristics of collateralized put writing may give many investors the courage they need to indirectly participate in the equity markets for the long run.  

We recently launched our Steady PutWrite strategy that includes alerts for an equity ETF BuyWrite portfolio and an equity index and ETF PutWrite portfolio. As an options focused website, naturally most of our subscribers are primarily drawn to the options portfolio. And for good reason, as equity index put writing is equally as compelling as owning equity ETF and mutual funds directly. In some ways, even more so. 

 

An August 28, 2018 InvestmentNews article titled "Equity index put writing: A strategy for uncertain markets" is a great read to develop a better understanding of collateralized put writing.  Using the historical data of the S&P 500 CBOE PutWrite Index (PUT), the author shows how writing cash secured puts produced similar returns as the underlying S&P 500 index, but with lower volatility and maximum drawdown. One particular chart in the article provided a great visual of how put writing tends to perform in different environments.

 

image.png.b86a0a91c06dc70210a9958a73b4c089.png

 

This next chart shows the total performance of PUT (portfolio 1) vs. the S&P 500 (portfolio 2).

 

1.png.4016ee7be3ddf0babb08acda2880f797.png

 

In our Steady PutWrite portfolio, we believe we can make incremental improvements to further increase the attractiveness of a put write portfolio. For example:

 

  1. PUT holds winning trades until expiration. Writing puts limits profits to the premium collected. During rising markets, we believe we can capture more upside by rolling trades before expiration when the vast majority of profits have already been earned. Sitting on dead options for several days or even weeks doesn't make much sense to us.
     
  2. PUT will also hold losing trades until expiration, which means during large market declines it will at times act like synthetic stock. We believe we can slightly reduce downside by rolling losers prior to expiration. Both #1 and #2 are modest active management techniques, as we want to maintain the "beta" of put writing overall. In other words, the historical evidence is clear that PUT isn't broke, so we don't want to spend too much time fixing it.
     
  3. PUT holds short term 1-3 month US Treasury bills as collateral.  In our Steady PutWrite portfolio, we believe it's sensible to replace T-bills with a small amount of term risk in the form of a low cost 3-7 year US Treasury ETF serving as our collateral. The term premium of 5 year Treasuries minus T-bills has been just under 2% per year over the last century, with premiums often showing up when most needed (equity bear markets). Of course, this is not guaranteed to be the case as well in the future, so we consider this an expected risk premium. 
     
  4. PUT is an index based on just one underlying, the S&P 500. Just as we believe in size and geographical diversification when owning equities directly, the same is true in designing a put write portfolio. In addition to the S&P 500, we add exposure to the Russell 2000 and the MSCI EAFE and Emerging Market indices. CBOE also has an index for put writing on the Russell 2000, PUTR, since 2001.
     
  5. In addition to asset diversification, we believe we add incremental improvements to risk adjusted returns by adding time diversification. PUT holds all contracts in the same expiration at the same strike.  The dynamics of option greeks mean that PUT will sometimes move dollar for dollar with the index and at other times only pennies on the dollar.  Our Steady Momentum put write portfolio splits up its holdings into more than one expiration, and oftentimes more than one strike, in order to produce more consistent exposure over time. We don't necessarily believe this improves absolute returns, but is likely to improve risk-adjusted returns.    
     
  6. Lastly, PUT is fully cash secured, or collateralized.  Due to all of the above expected improvements, we believe it's reasonable to use a modest amount of leverage to increase expected returns. Our Steady PutWrite portfolio targets notional exposure of 125%. Just as owning more shares of the underlying index increases your expected return, so does selling more contracts. We understand that many have a binary view on leverage, as there certainly is a graveyard of traders and funds that no longer exist due to excessive leverage. The irony is that many who subscribe to our service realize it's much more conservative than what they are used to because their past experience with put selling was in the form of highly leveraged credit spreads. Simply put, our very modest use of leverage is designed to make sure that we survive for the long run.

 

Conclusion 

 

The evidence of owning equities is compelling, but many are too frightened to do so because of short term volatility. Cash is comfortable in the short term and is hard for many investors to let go of. Collateralized put writing is one potential solution, allowing an individual to maintain their cash position and simply overlay a put selling strategy resulting in lower volatility and a higher success rate than owning equities outright. When implemented in a manner like we've described, put writing may even offer the opportunity for excess returns relative to indices. But as an advisor to clients for over a decade now, I can tell you this isn't what matters or what our PutWrite portfolio is really about. Instead, it's about simply staying in the game. This is what determines long-term real life outcomes. I'll take above average patience and discipline over above average intellect every single time when it comes to investing.

 

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.

What Is SteadyOptions?

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

  • SPX Options vs. SPY Options: Which Should I Trade?

    Trading options on the S&P 500 is a popular way to make money on the index. There are several ways traders use this index, but two of the most popular are to trade options on SPX or SPY. One key difference between the two is that SPX options are based on the index, while SPY options are based on an exchange-traded fund (ETF) that tracks the index.

    By Mark Wolfinger,

    • 0 comments
    • 251 views
  • Yes, We Are Playing Not to Lose!

    There are many trading quotes from different traders/investors, but this one is one of my favorites: “In trading/investing it's not about how much you make, but how much you don't lose" - Bernard Baruch. At SteadyOptions, this has been one of our major goals in the last 12 years.

    By Kim,

    • 0 comments
    • 648 views
  • The Impact of Implied Volatility (IV) on Popular Options Trades

    You’ll often read that a given option trade is either vega positive (meaning that IV rising will help it and IV falling will hurt it) or vega negative (meaning IV falling will help and IV rising will hurt).   However, in fact many popular options spreads can be either vega positive or vega negative depending where where the stock price is relative to the spread strikes.  

    By Yowster,

    • 0 comments
    • 480 views
  • Please Follow Me Inside The Insiders

    The greatest joy in investing in options is when you are right on direction. It’s really hard to beat any return that is based on a correct options bet on the direction of a stock, which is why we spend much of our time poring over charts, historical analysis, Elliot waves, RSI and what not.

    By TrustyJules,

    • 0 comments
    • 303 views
  • Trading Earnings With Ratio Spread

    A 1x2 ratio spread with call options is created by selling one lower-strike call and buying two higher-strike calls. This strategy can be established for either a net credit or for a net debit, depending on the time to expiration, the percentage distance between the strike prices and the level of volatility.

    By TrustyJules,

    • 0 comments
    • 1,343 views
  • SteadyOptions 2023 - Year In Review

    2023 marks our 12th year as a public trading service. We closed 192 winners out of 282 trades (68.1% winning ratio). Our model portfolio produced 112.2% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month and one essentially breakeven in 2023. 

    By Kim,

    • 0 comments
    • 5,706 views
  • Call And Put Backspreads Options Strategies

    A backspread is very bullish or very bearish strategy used to trade direction; ie a trader is betting that a stock will move quickly in one direction. Call Backspreads are used for trading up moves; put backspreads for down moves.

    By Chris Young,

    • 0 comments
    • 9,305 views
  • Long Put Option Strategy

    A long put option strategy is the purchase of a put option in the expectation of the underlying stock falling. It is Delta negative, Vega positive and Theta negative strategy. A long put is a single-leg, risk-defined, bearish options strategy. Buying a put option is a levered alternative to selling shares of stock short.

    By Chris Young,

    • 0 comments
    • 10,948 views
  • Long Call Option Strategy

    A long call option strategy is the purchase of a call option in the expectation of the underlying stock rising. It is Delta positive, Vega positive and Theta negative strategy. A long call is a single-leg, risk-defined, bullish options strategy. Buying a call option is a levered alternative to buying shares of stock.

    By Chris Young,

    • 0 comments
    • 11,312 views
  • What Is Delta Hedging?

    Delta hedging is an investing strategy that combines the purchase or sale of an option as well as an offsetting transaction in the underlying asset to reduce the risk of a directional move in the price of the option. When a position is delta-neutral, it will not rise or fall in value when the value of the underlying asset stays within certain bounds. 

    By Kim,

    • 0 comments
    • 9,482 views

  Report Article

We want to hear from you!


Great article @Jesse

I think the psychological factor is one of the most important - yet one of the most overlooked. Even if the put writing performs the same as S&P 500 (and we do expect that Steady Momentum will outperform with our tweaks) - the average investor has a much better chance to stay in the game and not to panic. Experiencing 50%+ drawdown on your portfolio is not easy - reducing it to only 30% goes a long way. And with the tweaks, it should actually be even smaller.

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