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  1. Selling puts seems to be of such interest that there are even ETFs, such as Wisdom Tree's Put-Write ETF (PUTW) that offer an easy path for the inexperienced investor to compliment their portfolio with put-write exposure. Over the years I've written scores of articles with the goal of trying to help investors use options intelligently. My perspective has always been to lay the fundamental groundwork that investors need before they go "jumping in" to areas that are complex. I hope this article will add to the reader's knowledge base. If the reader knows more, they can make better choices. Let me start off with a qualification. Many investors use options on a "one-off" or "hit-and-run" style. They are using options as a trading vehicle ... not as an investing vehicle. I can't and won't address this type of option usage because I'm an investor not a trader. Instead, I will concentrate strictly on the investor that is looking to supplement their portfolio. These investors typically sell puts as a substitute for direct stock ownership; an adjunct to portfolio protection; a "wait and see" and similar objectives. They are not "in-and-out" but more permanent in nature. Additionally, let me add that I will contain this article to selling puts on the S&P 500. Personally I use SPX options on the S&P 500 because of some tax benefits. However, position size and some other factors of SPX make it impractical for many investors. The concepts are easily transferable to options on the SPDR S&P 500 ETF (SPY) which tracks the SPX index pretty closely. Furthermore, though the principles put forth here are restricted to the S&P, they can be extended to almost any stock. The Selling Point No, I'm not starting out with the point at which one should sell puts. Instead, I'm referring to how options are "sold" or marketed to investors. For we must, at some stage, reconcile what investors are told with reality. The allure of selling puts is derived from the perception that they are less volatile and offer some downside protection as opposed to outright ownership of the underlying. This is mostly true. Selling puts can be less volatile and will out-perform in a steadily down market or a steadily flat market. At least in theory. The Theory The basic theory that attracts investors rests on the prospects of pocketing extrinsic value. If there were no extrinsic to pocket then one might just as well own the underlying. Now the amount of extrinsic varies with the strike, the expiry and volatility. So, though no one rule is universal, ATM puts extrinsic value ... with average volatility and weekly expiry ... usually ranges around .40% to .50% of the underlying price(and can be much higher at extreme volatility). So, if SPY is trading at, say, $290, one can expect the average weekly ATM extrinsic premium to be around $1.20 to $1.45. So if we extrapolate the potential gain using the .50% number and assuming the market is flat for one year ... one can make 26% by collecting .50% x 52 weeks. Pretty good considering investing in the underlying returned nothing. So, we start with a potential upside of 26% but we have to modify the potential return by accounting for losses incurred when the market drops. But 26% is a big cushion for absorption. The problem with this theory is there is no such thing as a steadily flat market ... or a steadily up market ... or a steadily down market. Markets are not steady. They unpredictably move in whatever direction they are headed in fits and spurts ... ups and downs ... zig-zags. I've been tracking the S&P weekly for the last four years. During this period the S&P has moved upward from $1,968 to $2,914 ... a gain of close to 50%. By all accounts a bull scenario. So, with a strong bull one would assume that down-movements that would otherwise erode the cumulative extrinsic would be modest. But if we looked at a chart .... not the usual chart of the actual S&P climb ... but rather of its weekly "fits-and-spurts" the picture is not as clear. Here's a chart that details how the S&P has performed ... weekly ... over the last four years ... from October 2014 through last week. So, looking at this chart at first blush and without further calculation, it is unclear if the S&P is net up, down or flat. Imagine ... in a strong bull market ... up 50% in 4 years ... a weekly chart doesn't look like that's the case. There are certainly many down weeks and many large down weeks. Now, if we further analyzed this chart ... not for its end gain of 50% .. but for how it got there ... we'd find the following: Number of Weeks If we broke this down even further we'd find: 1) over 1/3rd of the time (36%) the market is down, 2) When the market is down, almost half the time the drop is more than 1%. 3) 20% of the time the market is down it falls by more than 2% And remember ... this is on a weekly basis. So, even in a strong bull, down movements are common and substantial. It's just that up movements are more plentiful and overcome the down movements. What these charts also highlight is every strategy ... put writes, or not ... is dependent upon how successfully the investor manages the up and down swings as well as the over-riding direction. For surely, if one positions on the assumption of a down market and the market is actually headed upwards they will under-perform. Even if they guess the direction correctly, is a drop a reversal or a buying opportunity? Is a rise a bull indicator or a "dead cat"? Do they react emotionally and go the wrong way? What should one do? Should they go out-of-the money ---OTM; at-the-money ---ATM or in-the-money ---ITM? For surely, results will vary widely depending upon the accuracy of these decisions. So, let's take a look. At the Money (The Bad) Selling puts ATM means that on each expiry one simply rolls forward the put at the current price. If the market goes up, one chases the strike up and if the market goes down, one chase the strike down. Seems simple, but is it advantageous? Fortunately we can look to the performance of the Wisdom Tree Put-Write ETF (PUTW) for a simple comparison. Here goes: What we see is that PUTW was less volatile. But, most importantly, it also under-performed ... and under-performed substantially. Back in June 2016, I wrote an article on PUTW. In that article I explained that it suffered from a flaw ... that it is susceptible to volatility swings and can be "whip-sawed" in up/down markets. I suggested investors considering PUTW need to supplement their positions after a drop to avoid the "whip-saw". Now, I can't manipulate PUTW data to a "what if scenario" --- it is what it is. So, instead, let me go to my previous 4 year chart of the S&P weekly. Here's what an ATM strategy, sold weekly (PUTW uses monthly but it's conceptually the same) would have looked like: As is evident, the result parallels the performance of PUTW. So we see consistent result that would lead one to examine why such a huge nonperformance. Is the concept of selling puts wrong or is the execution wrong? But before I go into a deeper examination of the issue, let me be fair and illustrate that in a down market put-writes would outperform the underlying as this hypothetical chart reveals (for this purpose I simply reversed the actual S&P values ... starting at $2,914 and dropping to $1,968) Selling Puts ATM in a down market will do better than owning the underlying. But it still loses. Hold The Strike (the Good) The problem with selling ATM puts is the "whip-saw". One must move away from the thought that the market will be "steadily" anything and accept that it will zig-zag up or down. So, 36% of the time the hoped for extrinsic gains will be reduced. Over half those times it will not only be reduced, but completely wiped out and thrown into losses. This raises a dilemma ... if in a bull scenario, the investor losses substantial extrinsic value ... and extrinsic value is all they have to gain ... what does one do? The answer to this dilemma is to Hold The Strike. What this means is that if there is a drop, do not chase the drop by selling the next put ATM at the lower price. Sell the put ITM at the previous strike and hold it there --- as long as necessary --- until the strike is recovered. You'll earn a little less extrinsic but avoid the "whip-saw". So, if SPY is at $290 when you sell the first ATM strike and it falls to $$288 ... do NOT roll the put ATM at a $288 strike but hold it at $290 strike. Most importantly ... keep holding that strike until SPY recovers and then go back to ATM ... until such time as it drops, again. It may recover in a week, a month or a few years. But just keep at it. What this does is recover any loss of extrinsic value that occurs on a drop when the inevitable bounce occurs. Here's a chart that shows the results of a "hold the strike" put-write strategy, employed weekly over the last four years. Wow !!! Let's make sure we read this right: 1) The S&P ended up $947 to $2,915 a 50% gain 2) ATM (such as PUTW) ended with just a gain of $440 ... up 22% 3) Hold the strike gained $1,568 ... up almost 80% Now I certainly realize that this must be astonishing to many readers. It's impossible to put all the numbers in plain sight or share the algorithms. So, instead, let me give you some simple resultant math. ATM: The total amount of potential extrinsic was $2,744 ... or an average of $13.45 per week. There are no gains if S&P rises above the strike. However, there are intrinsic losses on dips that were NOT recovered (whip-sawed) that totaled $2,304. So, the net gain was only $440 ($2,744 extrinsic gain less $2,304 intrinsic loss on down weeks). ATM-Hold the Strike:The total amount of extrinsic was $1,568 ... about $7.68 per week. Though the full $13.45 extrinsic is earned on every ATM strike the extrinsic is reduced for every ITM "held" strike. So we have less extrinsic but more upward intrinsic. One loses $1,176 extrinsic as compared to selling ATM ... but the sacrifice of extrinsic means one recovers the down move loss on the bounce and that zeroes out the losses. So. with the down loss zeroed out ... one is left with 100% net extrinsic gain. The sacrifice of $1,176 in extrinsic regained $2,304 in intrinsic. So, that means a net gain of $1,128. That's the difference between up 22% and up 80%. And that's why hold the strike is so successful. Out of the Money (the ugly) I seem to always hear about selling deep OTM puts ... so deep that they have a 90% chance of winning. It's the "easy money" play. I need to address the "90% win" mentality. As we saw from the previous weekly up-n-down chart ... over the last four years ... in a raging bull market .. the win ratio would have actually come in at around 93% for DOTM put-writes. Right around where the "easy money" player was planning. Hurrah !!! ... or maybe not. Let's see what would have happened for weekly DOTM put-writes over the last four years after accounting for the 7% of the time they lose. I've illustrated 2% and 3% DOTM. Now I won't go into detail other than to make these observations: 1) 2% DOTM shows a net loss but 3% DOTM a gain of $50. That $50 gain represents ONE SPX option and translates to $5,000 in actual monetary gain. However, it is not without a price ... the exposure is between $200,000 and $300,000 if one uses cash secured puts and utilizes about $75,000 in margin, otherwise. 2) One could do better if they entered at different points, but the future will even that out. 3) Trading costs are not included. Assuming just $7.95 per trade ... 204 trades .. and it reduces the gains by over $1,500 for a net gain for the 3% DOTM of around $3,500. Had the "easy money" player just put the $75,000 in margin in a CD would have returned more. Not to mention the huge differential in favor of putting a cash secured $200,000 in a CD for four years 4) However, all the dynamics change in a positive way simply "holding the strike" on every over-run. I guess there's a difference between "easy money" and "smart money" In The Money (more good?) In all three of the strategies so far presented the investor is simply trying to earn extrinsic value. S&P rises earn nothing more. Now, that leads to whether one should try to gain some upward intrinsic as well. In essence, sacrificing even more extrinsic by going ITM and looking to gain from upward movement. If someone could actually have placed the strike exactly at the most opportune level ... week in and week out ... they would have increased their overall gain by about another 45%. Nice to dream about ... impossible to achieve. However, this begs the question ... how far ITM should one go? Frankly, I don't know. That said here's a chart that shows the results if one went 1% ITM and held the strike. So, what one sees is that ATM "hold" is still the most lucrative. Next in line is going 1% ITM and "holding". Third place is outright ownership of the underlying and in last place is ATM. Now, of course, there must be some optimum level that will improve the ITM and move it further up the chart and perhaps some level that will overtake ATM "hold". My guess is that the optimum level lies somewhere between 1/2% and 3/4%. But I haven't found the precise level. And, of course, none of these charts account for applied intelligence and adjusting the strike up or down based upon one's market acumen. Keep in mind that this is general principles only. Even so, unless one has market foresight that is better than average, playing with and trying to improve on fundamentals can be a mistake. But, let me stress, no matter what ... whatever one does ... they MUST "hold the strike". Summary What I've tried to do here is illustrate various put-write strategies. Of course they are based upon past results in a bull market. By illustrating these different strategies it becomes apparent that the flaw in selling puts is failure to account for "whip-saw". But this failure can be easily overcome by "holding the strike". Now, I won't argue that one could do better "timing the market". There are always "experts" that can brag about how they make perfect decisions and have a 6th sense about these things. However, studies have shown that for most investors, timing the market is dilutive and not accretive to returns. I'm hoping to speak to a broader audience than the "trader". With all that said, this article leaves out another strategy for put-writes. A strategy that requires more than an "add-on" to an otherwise long enough article. Though I don't like cliff-hangers, readers will have to wait till my next article to round it out. Ken Reel is a well known and respected Seeking Alpha Contributor with over 100 articles. He has worked in the financial service industry for 40 years. Ken's area of expertise is risk management and complex financial products. He has been a frequent speaker, on behalf of many financial firms, to financial professionals across the country. He has extensive experience in statistics and actuarial science.
  2. 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. This next chart shows the total performance of PUT (portfolio 1) vs. the S&P 500 (portfolio 2). In our Steady PutWrite portfolio, we believe we can make incremental improvements to further increase the attractiveness of a put write portfolio. For example: 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. 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. 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. 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. 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. 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.
  3. Selling puts on the S&P 500 has been a good strategy since the mid 1980's, based on CBOE's Put Write Index (PUT). In the referenced article, I showed how adding a time series momentum filter to PUT further improved risk-adjusted results, while also mentioning that creative investors could use assets other than T-bills/money market as the underlying source of collateral. We'll also look at that here. First: Replicating the strategy in the article, how has it done out of sample the last 23 months? Notes... Equal Weight Portfolio = PUT Timing Portfolio = Times series momentum applied to PUT Vanguard 500 Index Investor = VFINX Given that the S&P 500 has been up so strongly during the last 23 months, it's no surprise that PUT underperformed the index. This is expected during strong bull markets where put selling has gains limited to the amount of monthly premium collected. The time series momentum overlay stayed invested the entire time, thereby doing its job since there were no major drawdowns along the way to avoid. Next, we can look at two examples of ways to enhance the returns of our momentum approach. First, instead of holding bonds only when momentum is negative, we'll hold bonds (instead of T-bills) all the time (via VBMFX) in addition to our put selling. This further improves results, but it should be noted that this could only be done in a non-retirement margin account. All the brokers I'm aware of would prohibit this type of portfolio in an IRA. The risk-adjusted results here are impressive for such a simple strategy. So what are the drawbacks? Here are a few to consider: 1. We saw in the last 23 months that put selling can underperform in a raging bull market. Investors could consider substituting part of their traditional equity exposure with put selling for this reason. 2. Future returns may be lower. As more market participants become aware of the strong historical risk-adjusted returns offered to those willing to sell options, more supply can impact premiums. 3. Risk-adjusted bond returns have been extraordinary since 1990 due to falling rates, with VBMFX producing a Sharpe Ratio of 0.78. This is unlikely going forward. 4. Time-series momentum can and will occasionally create whipsaw trades. Again, the solution to this is continuing to maintain a healthy portion of your equity portfolio with traditional index funds and/or ETF's. 5. The returns shown are pre-tax, and option selling is tax inefficient due to the high turnover, even after considering the special 60/40 treatment that cash settled index options receive. All of the bond income would be taxable as well (although substituting VBMFX with VWITX gives similar results). The ability to defer capital gains until sold and forever when bequeathed is one of many reasons why index funds are so attractive. One more example: Instead of collateralizing 100% of our put selling with bonds, we'll do it with 20% equities and 80% bonds. Since PUT is based on large caps, we'll add factor diversification by allocating half of the equities to a US small cap value index, and the other half to an International small cap value and emerging market value index. Adding cash equities to the portfolio further improves results, and would also improve tax efficiency. Even though this type of portfolio may be simple, its creativity makes it quite unconventional. But for someone willing to succeed unconventionally, the data suggests the minimal effort involved is worth it. And for those lacking the time, interest, or confidence to do it themselves, we run portfolios similar to this for clients if you'd like to have a discussion about it with us. Thanks for reading. 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™. 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. Jesse is managing the PutWrite portfolio and forum, the LC Diversified Fund, as well as contributes to the Steady Condors newsletter.
  4. The same diversification benefits that would apply to owning the equities outright via ETF's should transfer over to put writing, and all of these products have a highly liquid options market. In this post, we'll look at a simple backtest that includes SPY, IWM, EFA, and EEM from 2007-2018. The weights and parameters will be as follows: SPY: 30% IWM: 20% EFA: 37.5% EEM: 12.5% This roughly correlates with current global cap weighting, with an overweight to small cap in the US. The put selling parameters are simple as well: 30 DTE entry, held until expiration, selling the strike closest to 50 delta (roughly at the money). Results are net of transaction cost assumptions for both commissions and slippage, and options are assumed to be fully collateralized with 1 Month US T-Bills. Option backtests were done with the ORATS Wheel, which comes with a free trial. It's a great tool that I highly recommend for those interested in backtesting option strategies, which otherwise can be quite a challenge. I then uploaded the data to Portfolio Visualizer to be able to simulate a portfolio inclusive of T-bill collateral yield. Hypothetical Results: (Portfolio 1 represents our put write portfolio. Portfolio 2 represents holding the ETF's directly in the same weights, with monthly rebalancing): Results are hypothetical, and do not represent performance that any investor actually attained. Past performance doesn't guarantee future results. During this 12 year period we see a nice improvement in risk-adjusted returns with our put write portfolio relative to owning the ETF's directly. A shallower drawdown during the 2007-2009 GFC, roughly 35% less portfolio volatility, and even a slight overall improvement in total return. During a tough 2018, the put write portfolio would have been down about half as much as the ETF portfolio (-5.5% vs. -10.6%). This outcome is similar to what can generally be seen when studying CBOE's PUT (S&P 500 put write) and PUTR (Russell 2000 put write) historical index data which extends back much further. For example, PUT historical data starts in 1986, allowing investors to analyze over 3 decades of hypothetical put writing performance. Conclusion Options are an incredibly versatile asset that can be used to strengthen an overall portfolio in many ways. The volatility risk premium, which largely explains the positive performance of put writing, is not something we should expect to go away for the same reasons we don't expect the equity risk premium to go away. Both can be thought of as having an intuitive risk-based explanation. Retail and professional traders could likely improve their long term equity allocations by incorporating put writing into their investment process. 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. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.
  5. Mark Wolfinger

    Selling naked put options

    The options, by themselves, are not dangerous tools. I mention that because one of the long-lasting misconceptions about options is that they are dangerous to use. It is possible to use options to speculate (gamble), but options were created as hedging, or risk-reducing, investment tools. An alarming number of financial professionals, including stockbrokers, financial planners and journalists are in position to educate the public about the many advantages to be gained from adopting naked put writing (and other option strategies), but fail to do so. Many public investors never bother to make the effort to learn about options once they hear negative statements from professional advisors. Except for extremely bearish prognosticators, no one ever suggests that owning stock is anything but the most prudent of investment strategies. Yet, writing naked puts is a significantly more conservative strategy and definitely less risky than simply buying and owning stocks. As such it deserves to be considered as an attractive investment alternative by millions of investors. Who should consider writing naked (uncovered) puts? 1. Investors Who are bullish on the market Who are bullish on specific stocks Who want to buy a specific stock at a lower price Who adopt a buy and hold strategy Who want additional income from their holdings 2. Traders Who want a higher percentage of winning trades Willing to consider holding a position for a month or two Who want to begin a spread position with a bullish leg Strategy Objective Why would you want to write naked puts? What is there to be gained? Writing naked puts is a bullish strategy. When selling naked put options, you are attempting to achieve one of two investment goals Profit. You are bullish on the stock and expect the put option to lose value, and perhaps expire worthless as time passes. If the latter happens, the option premium (cash from selling the put option) becomes the profit. Buy stock at a discount. If the put option is in the money when expiration arrives, you will be assigned an exercise notice and be obligated to buy the stock you want to own at a discount to today’s price. This is an intelligent method for an investor to gradually add positions to a long-term portfolio. NOTE: When you are eventually assigned that exercise notice, the stock may be below your target purchase price. However, if you had entered an order to buy stock at that target price, you would be in worse shape than the put seller (who cushioned any loss by the amount of the premium). Another alternative is combining put selling with call selling, a strategy known as the Wheel strategy This post was presented by Mark Wolfinger and is an extract from his latest book Writing Naked Puts (The Best Option Strategies). You can buy the book at Amazon or sign up for our free trial and get it for free. Mark Wolfinger has been in the options business since 1977, when he began his career as a floor trader at the Chicago Board Options Exchange (CBOE). Mark has published four books about options. His Options For Rookies book is a classic primer and a must read for every options trader. Mark holds a BS from Brooklyn College and a PhD in chemistry from Northwestern University.
  6. "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: 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 selling strategy is now available in an ETF structure from Wisdom Tree. More active investors that follow our Steady Options content may be interested in replicating the PUT selling strategy 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. All charts and statistics were custom generated at 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.