SPY Short Puts vs. Put Spreads

Short put results

Since 2007 30 DTE 40 delta SPY short puts held until expiration sized at 100% notional (i.e., cash secured) have had the following results: 

• Average return: 6.85%
• Annual volatility: 9.1%
• Max Drawdown: 36.5%
• Sharpe Ratio: 0.75

81.7% of trades were winners.

Short put spread results

Since 2007 30 DTE 40/30 delta SPY short put spreads held until expiration sized at 100% notional (same position size as the short put) have had an average annual return of 1.1% per year with an annual volatility of 2.4%. The max drawdown was 11.1%. 76.1% of trades were winners.

The results show that short puts have had both higher returns as well as higher risk adjusted returns than short put spreads. The long put associated with the short put spread has a negative impact on both absolute returns and risk adjusted returns. For example, if we calculate Sharpe Ratio as average return divided by annual volatility, we get 0.64 for the short put and 0.46 for the short put spread. To adjust the put spread to have comparable risk as the short put, you could sell 4 put spreads per 1 short put. What do those historical results look like?

Short Put Spread sized at 4x notional (4 put spreads per 1 short put)

• Average return: 4.5%
• Annual volatility: 9.6%
• Max Drawdown: 43.6%
• Sharpe Ratio: 0.46

The short put spread increased in position size to have similar annual volatility as the short put still has worse risk adjusted returns. This is the price to pay for a defined risk trade, and makes sense when we think of put options as the equivalent of insurance. When we spread off a short put with the purchase of a long put, we’re adding an insurance like position to our trade that caps how much money we can potentially lose. Over time, the expected return of that insurance is negative.  For this reason, I personally prefer the simplicity of the short put over the added complexity, slippage, and commissions of the put spread. The same is true when we add calls where I personally prefer short strangles over iron condors.

If we compare credits received, I find the following as of April 21^st 2021 when I look at SPY options expiring 30 days from now.

• 40 delta put (strike: 411): $5.37
• 30 delta put (strike: 405): $3.88

A short put would collect $5.37 of premium, while the 40/30 delta put spread would collect $1.49. 4 contracts of the spread would collect $5.96, which is slightly more than the short put. This fact may entice traders without access to backtesting to prefer the put spread. One additional consideration is the strike selection of the long put in the put spread, and my testing in ORATS shows that risk adjusted results get worse the closer the long put is to the short put. This makes sense, as the farther away the long put is the less impact it has on the trade.

Summary

Traders often wonder if it makes more financial sense to trade a short put or more contracts of a short put spread. ORATS backtesting data indicates that short puts have higher risk adjusted returns than short put spreads. I’ve found this result to be robust to multiple underlying symbols in addition to SPY. If you’re trading in a small account a short put spread can still make sense as a way to control your exposure since a short put will always require more capital than a put spread, but as your account grows to a point where you have enough capital to trade short puts your expected risk adjusted returns will improve with a short put. This is why we use the short put as our preferred option trade in the Steady PutWrite Strategy. It is both simple and effective over the long term.

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.