Tuesday, January 13, 2009

More on PUT Returns

Given the surprising interest in put-write strategies and the CBOE PutWrite Index (PUT), I have spent some additional time with the PUT data to see what sort of secrets I might be able to uncover.

I must confess that the more I dig, the more I am intrigued by this index put-write approach. Since there has been considerable discussion about the differences in return between the PUT and the closely related CBOE BuyWrite (BXM) Index, I will start by showing a table that has a year-by-year comparison of the PUT and the BXM. Just for fun I threw in the average VIX for each year, the change in the average VIX from year to year, the VIX range for the year and a ratio of that range divided by the average VIX. While none of these additional data points provides a smoking gun, each offers up a piece of the overall performance puzzle.

The second graphic is a simple matrix of monthly returns for the PUT since 1986. Not surprisingly, the two worst monthly returns were during the volatility peaks in October 1987 and October 2008. In a related note, several of the most profitable months for the PUT came just after high volatility events.

[Source: CBOE, VIX and More]

For those looking to dig deeper into this issue, consider that put-write absolute and relative returns are largely a function of implied volatility, the trending characteristics of the SPX and interest rates. Note also that that upper chart only goes back to June 1st, 1988 because that is when Standard & Poor’s began reporting daily dividends for the S&P 500 Total Return Index.

57 comments:

Mark Wolfinger said...

Bill,

I can think of two reasons why PUT returns differ from BXM returns.

1) "This design provides higher leverage than the BXM strategy"

This quote is from the CBOE site you referenced: http://www.cboe.com/micro/put/PutWrite.pdf

2) BXM writes the first front-month call that is out of the money.

PUT seems to use a 'series' of 'ATM puts.'

I did not research just how many different options are written. Nor did I find the definition of ATM. Is it the nearest option, or is it the nearest OTM option?

Thus, using different options to write plus the leverage factor should be all it takes for these indexes to provide different returns.

Mark

Anonymous said...

First, answer to Mark Wolfinger's query - S&P's Put Write Index is the function of one month ATM options sold, and rolled over soon after the expiration, as pointed by ENNIS KNUPP article. The article further suggests that return can be enhanced by selling 4 months ATM options.

Second, I am not sure if Bill's "Put" return matrix takes into account return on T-bills from the premium collected which could be approximately 4.1%. If that is the case, then return should be approximately higher by an average of 4.1% on the "put" matrix.

Chandra

Bill Luby said...

Mark and Chandra,

Thanks for weighing in. It seems as if this may be a multi-part answer.

Chandra, the return on the T-Bills is accounted for as part of the total return calculations.

Also, for the record, one of the developers of the PUT index indicated to me that part of the reason for the performance delta for the PUT vs. the BXM is due to differences in the way the PUT and BXM contracts are rolled, with the PUT takes advantage of "typical trading patterns" that occur on expiration. I can't say I am an expert on trading patterns related to expiration, but this appears to be another piece of this puzzle.

Cheers,

-Bill

Jim said...

What would the returns be if instead of selling at the money puts, you sold them 5% out of the money?

Jim

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