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.

Short Put vs Buy and Hold


A while ago I discussed a simple strategy that beats most traders which consists of simply being long SPY to obtain market-like returns plus dividends. If 90 - 95% of traders lose money, then following an index with a positive return guarantees you beat a huge % of that population.

If 75% to 90% of "professional" money managers fail to beat the S&P500, then you are also guaranteeing better results than most "professionals". So, overall you are being extremely lazy, keeping trading costs to a minimum, as well as tax liabilities. You are paying very little attention to the markets and still, beating the vast majority of participants while nicely growing your nest egg.

I also argued that perhaps selling out of the money Calls, in addition to holding the index, was even better but I was not sure until I saw the evidence: BXM, an index that simulates a permanent Covered Call strategy on the S&P500 and has beaten the market in almost three decades. I discussed BXM in the Covered Call vs Buy and Hold article.

Well, today I want to talk about another very simple strategy that beats most traders/investors: 
Short Puts on the index, the CBOE PutWrite Index (PUT)

PUT-WRITE-INDEX.PNG
 
Option selling strategies constantly cap the maximum profit in your positions. If you are Short Puts and the market rallies +30% like it did in 2013, then you make money but the buy & hold investor outperforms without question as he didn't put a ceiling to his maximum potential profit. This can be illustrated by the last five years of unstoppable Bull markets:
 
PUT-SPY-Bull-market.PNG
 
However this is the only scenario where the PUT index under-performs. Option selling strategies constantly reduce cost basis and generate more consistent profits which overtime lead to out-performance over the Buy & Holder and smoother equity curves (Just notice in the small example above how the draw-downs are smaller for PUT).

If you are selling a Put on an index and the market moves sideways you out-perform the buy & holder who went nowhere. If the index goes up, slightly (by less than the premium collected by the Put seller), the Short Put strategy still outperforms the buy and holder. If the market falls, the short Put loses, but the cost basis for the investor is smaller than that of the buy and holder, who is also losing. So, in these three scenarios the Short Put wins over Buy and Hold which only outperforms during very strong markets.

Based on this idea, the PUT index was created by the CBOE years ago and it aims to simulate a permanent Short Put strategy on the S&P500. Taken from the CBOE site:

"PUT is an award-winning benchmark index that measures the performance of a hypothetical portfolio that sells S&P 500 Index (SPX) put options against collateralized cash reserves held in a money market account. The daily historical data for the PUT Index now extends back to June 30, 1986."

So, what is the performance of the PUT Index anyways?
 
Well, according to the CBOE, going back to 1986 the PUT index has returned +1153% as of this writing, handily outperforming the S&P500's  +807% return in the same period.

What is more remarkable is the fact that it has done so with about 30% less volatility than the S&P500.

In terms of Risk Adjusted Returns, PUT shows a Sortino Ratio of 0.90 vs 0.50 for the S&P500. So, less risk, better returns. It's not that the strategy has obtained better returns because it is "riskier". It is in fact less risky.

Without a question, PUT is a superior strategy than Buy & Holding SPY (as proxy for holding the S&P500). But what about BXM?
 
Is PUT better than BXM, the permanent Covered Call index?  
 
Again going back to the CBOE data, the answer is an unequivocal yes. Both PUT and BXM have outperformed the SPX and have done so while suffering about 30% less volatility than the S&P500, but in terms of absolute returns, PUT beats BXM. Since 1986:

PUT: +1153%
BXM: +830%
S&P500: +807%


That is as of this writing (October 2015) 

The next interesting step would be to investigate how a portfolio made up of both PUT and BXMperforms, with half the capital allocated to each index. I'm curious about the potential of that approach where you are owing SPY, receiving dividends from it, selling Covered Calls on it and additionally shorting Puts to constantly reduce cost basis. All happening at the same time. This simulation is possible given the fact that the data on both indexes is public and free. So, I'll see what I can do. Even if the absolute return of this approach is about the same, it could still be worth it if it shows better risk-adjusted returns and even smaller draw-downs. Folks, has anybody seen some research on this? A portfolio combining both PUT and BXM? If so, feel free to share in the comments section.

Another nice thing about PUT is that it is compatible with tax advantaged accounts, like an IRA. Even though deep down, the mechanic is that of naked short selling, in practice you are simply "long" an Index, so it's perfectly legal.

If I were a passive Index follower with a very long term horizon of more than a decade, I would definitely invest in BXM and PUT instead of the S&P500. Without question. That way, I'm not only beating the majority of retail traders and professional money managers. I'm also beating passive index followers in the long run and suffering much less throughout the process (less volatility and smaller draw-downs). 

UPDATE: After some email communication with readers it has been confirmed that both the PUT index and BXM index are just benchmarks for a public strategy but cannot be invested on directly. However, there are instruments that follow both index and can be used for investing or active trading. PBP can be used as a substitute for BXM and HVPW can be used as a substitute for PUT (Thanks Cherry)

For more information on the PUT index, visit the following CBOE pages:
Definition and Results at a high level
The PUT index methodology
Research on PUT's out-performance over BXM
 
This article was written by my good friend Henrik aka The Lazy Trader.
 
The article was originally published here.

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

  • Pre-earnings Momentum Trade in Netflix

    Netflix has earnings due out Monday, October 16th, after the market closes. Seven calendar days before then would be 10-9-2017. Coming off of a nice win in THO, now it's time to look at the company's remarkable history of momentum into earnings events and how it compares to FAANG more broadly. 

    By Ophir Gottlieb,

    • 1 comment
    • 545 views
  • Microsoft Pre-earnings Momentum Trade

    Microsoft has earnings due out on October 26th, 2017, after the market close, according to Wall Street Horizon. 7-days before then would be October 19th, 2017. Microsoft is the forgotten mega tech -- the third largest company in the world behind Apple and Alphabet, but it doesn't fall into any fun Acronyms, like FANG, or FAANG. 

    By Ophir Gottlieb,

    • 14 comments
    • 793 views
  • Options Greeks Explained

    Options Greeks measure the different factors that affect the price of an option contract. Unfortunately, many traders do not know how to read the Greeks when trading. The following infographic provided a brief explanation of the most important Greeks: theta, delta, gamma vega and rho.

    By Kim,

    • 0 comments
    • 328 views
  • Option Trade After Earnings in AutoZone

    AutoZone Inc (NYSE:AZO) has earnings due out tomorrow, 9-19-2017 before the market opens and we can look at a slightly advanced option trade that starts two calendar days after AZO earnings (9-21-2017) and lasts for the 19 calendar days to follow, that has been a winner for the last 3 years. 

    By Ophir Gottlieb,

    • 0 comments
    • 418 views
  • Why Winning Ratio Means Nothing

    A lot of options traders consider 90% probability strategies a Holy Grail of trading. After all, if you can win 90% of the time, you should be able to grow your account very quickly, right? Well, not only this is not true, but in fact, winning ratio alone tells you NOTHING about your chances to be profitable. 

    By Kim,

    • 0 comments
    • 1,960 views
  • Post Earnings Option Trade in Facebook

    For Facebook Inc, irrespective of whether the earnings move was up or down, if we waited one-day, and then sold an one-week at out of the money iron condor (using weekly options), the results were quite strong. This trade opens two calendar after earnings to try to let the stock find equilibrium after the earnings announcement. 

    By Ophir Gottlieb,

    • 0 comments
    • 339 views
  • The Incredible Option Trade in VXX

    The iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX) is referred to as "the VXX.". The obligation of the VXX is to match the performance of the S&P 500 VIX Short-Term Futures Index Total Return and that is a strategy index which maintains positions in the front two-month Volatility Index (VIX) futures contracts. 

    By Ophir Gottlieb,

    • 0 comments
    • 777 views
  • The Art of Trading Decisions

    One of my basic tenets in teaching people how to trade options is that rules and guidelines should not be written in stone and that there are valid reasons for accepting or rejecting some of them. When I offer a rationale or explanation or suggest course of action, it is because I have found that this specific suggestion has worked best for me.

    By MarkWolfinger,

    • 0 comments
    • 356 views
  • Trade Iron Condors Like Never Before

    Iron Condors have gained a lot of popularity among professional money managers and retail investors. It is a market neutral strategy that allows you to profit when the underlying price moves sideways. Iron Condors usually have a limited risk and a high probability of success.

    By Kim,

    • 2 comments
    • 6,626 views
  • Early Exercise: Call Options

    How would a trader like you decide to do early exercise? Say you bought calls when they were trading in the 1.0 -> 2.5 range, now underlying has risen so that calls trade bid-ask at 4.0 / 4.8 and there is strong possibility of it going higher. Also assume in another case that they trade in the 6.0 to 7.0 range.

    By MarkWolfinger,

    • 0 comments
    • 1,860 views

  Report Article

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...

×   Pasted as rich text.   Paste as plain text instead

  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

×   You cannot paste images directly. Upload or insert images from URL.

Loading...