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 option selling 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 Put options 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 options strategy still outperforms the buy and holder. If the market falls, the Short Put options lose, 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

  • Diversified Leveraged Anchor Performance

    In our continued efforts to improve the Anchor strategy, in April of this year we began tracking a Diversified Leveraged Anchor strategy, under the theory that, over time, a diversified portfolio performs better than an undiversified portfolio in numerous metrics.  Not only does overall performance tend to increase, but volatility and drawdowns tend to decrease:

    By cwelsh,

    • 1 comment
    • 198 views
  • The Best Chart I’ve Seen in 2020

    The best visual aids for learning are often very simple. The chart in this article was created by Paul Merriman, using data from Dimensional Fund Advisors. I primarily use Dimensional Funds in building portfolios for my clients. There are many takeaways from this chart, and I’d like to share a few thoughts that stick out most to me.

    By Jesse,

    • 0 comments
    • 195 views
  • Traditional or Roth Retirement Account?

    When US investors save for retirement, there are many important decisions that have to be made including which investments to use as well as which type of accounts to fund. Tax favored retirement accounts such as 401(k)’s and IRA’s should be utilized to the maximum extent possible because of the opportunity for tax advantaged growth.

    By Jesse,

    • 0 comments
    • 270 views
  • My Favorite Investing Books, Blogs, Papers, and Podcasts

    There are so many excellent sources of investment education available today that I thought a short post about some of my personal favorites could be beneficial. Below are different forms of content that have been particularly impactful to my investment philosophy, and they are not in any specific order.

    By Jesse,

    • 0 comments
    • 535 views
  • Go For Gold! The Business Behind The Dazzle

    The price of gold is often in the news—sometimes it's rising, and other times it's dropping but for the most part, it has been on a steady increase for many years. It is certainly worth more now than it did twenty years ago. When its price is on the rise, we may have thought about the benefits of selling our gold for profit and making some passive income from it.

    By Kim,

    • 0 comments
    • 310 views
  • Using Bullish Calendar Spreads to Profit on MSFT Stock

    A calendar spread is an income trade where the trader sells a near term option and buys a longer-dated option with the same strike price. Usually this is done with monthly options, but it can also be done with weeklies. They are long volatility trades so can be a nice addition to a portfolio as a way to offset some short vega.

    By GavinMcMaster,

    • 0 comments
    • 605 views
  • 3 Principles to a Successful Investment Experience

    Although not an exhaustive list, what I’ll present in this article are three core principles that overwhelmingly stack the odds of a successful long-term investment experience in your favor. These three principles are asset allocation, diversification, and rebalancing.

    By Jesse,

    • 0 comments
    • 428 views
  • Important Tips For First Time Currency Traders

    Diversifying your portfolio is important for all investors, and currency investments are a great way to do that. However, there are a lot of misconceptions and common mistakes that first time currency investors make, and this leads to big losses.

    By Kim,

    • 0 comments
    • 450 views
  • Iron Condors or Short Strangles?

    In my early option trading days, I favored selling iron condors over selling strangles. I thought that selling a strangle was too risky because the potential loss was “undefined”. I thought this made sense because this is what I’d hear from other people that were more experienced than I was.

    By Jesse,

    • 0 comments
    • 1,952 views
  • How To Be A Successful Day Trader From Home

    The good news is that if trading is your passion, then it’s possible to become a successful day trader and work from home. However, it’s not as easy as setting up shop and jumping online. There are specific steps and processes you need to have in place if you’re going to be able to make a living for yourself and have a bright career and future.

    By Kim,

    • 0 comments
    • 590 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 emoji 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...

Options Trading Blogs Expertido