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Thursday, January 10, 2019

Outperformance of a Put selling Strategy

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One of the cons often mentioned about Put selling strategies is that you miss out on the larger gains that a stock rally would have provided.

It is true, that in the event of a strong rally (be it a stock or an index), holding shares directly lets you participate in potentially larger gains. However, not all stocks or indexes for that matter are constantly rallying. In many instances they face long periods of sideways back and forth, sometimes even years.
The S&P500 Put write index (symbol PUT) 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.”

As specified in the methodology by the CBOE: “The SPX puts are struck at-the-money and are sold on a monthly basis, usually on the 3rd Friday of the month…”

The results over 30 years (1986-2016) show that this simple methodology outperforms pure holding of the S&P500 index.

Taken from the Put Write Index Fact Sheet
Not only does it outperforms, but it also does it with a smaller standard deviation (less volatility).
In years of strong Bull markets, the PUT strategy tends to underperform as it collects less premium from the Options, than the gains the markets are making. However, the index outperforms in flat years and negative years, and even in some bullish years:

Notice how PUT outperforms in 2008 during the global financial crisis. It had a negative year, but definitely less so than the S&P500. Then in 2009 it also outperformed despite the strong recovery of the equity markets. However, it generally under-performs in strong years. Which is what has happened in recent years. Notice also the out-performance in 2015, a pretty flat year. This is expected. 

This is a clear example of how a simple active Put selling strategy outperforms the stock market S&P500 index with smaller risks.

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