Historical Performance of Put-Writing Strategies

Abstract

This paper analyzes the historical performance of two Cboe put-writing indices through the end of 2018. PUT and WPUT indices are found to have had a strong performance in several areas:

1) Long-term performance. Over more than 32-year period, PUT has the annual compound return comparable to that of the S&P 500 Index, but with a substantially lower standard deviation. As a result, the annualized Sharpe ratio is 0.65 for PUT and 0.49 for S&P 500.

2) Annual premium income: From 2006 to 2018, the average annual gross premium collected is 22.1% for PUT and 37.1% for WPUT. Premiums for WPUT are smaller, but collected weekly instead of monthly, which results in higher aggregate premiums.

3) Lower risk: Since the launch of Weekly options in 2006, WPUT has lower standard deviation, market beta, and drawdowns than PUT and S&P 500. In particular, the maximum drawdowns are 24.2% (WPUT), 32.7% (PUT), and 50.9% (S&P 500).

4) PUT versus option buying strategy PPUT: Since 1986, PUT has a much higher annual compound return that PPUT (9.54% versus 6.64%), a lower standard deviation (9.95% versus 12.08%), much higher risk-adjusted measures, and a less severe drawdown (the maximum drawdown of -32.7% versus -38.9%, the longest drawdown of 40 months versus 80 months). PUT has a negative exposure to the volatility risk, which accounts for 0.29% of its average monthly return. In contrast, PPUT has a positive exposure to the volatility risk, which accounts for -0.17% of its average monthly return.

Keywords: put writing indexes, weekly options, implied and realized volatility, variance risk premium

JEL Classification: G13