Friday, January 9, 2009

The Often Overlooked Put Writing Strategy

Shame on me for going a year and a half without mentioning the CBOE S&P 500 PutWrite Index (PUT), a recipient of the Most Innovative Benchmark Index award at last year’s Super Bowl of Indexing Conference.

Given all the market volatility for the past three months or so, I suspect that a put writing strategy is probably not top of mind for most investors at the moment. In fact, a put write strategy like one tracked by the PutWrite Index will generally outperform the S&P 500 index in a down trending market and significantly outperform the S&P 500 index in a sideways market. Much like a covered call strategy, however, a put write approach will not match the gains of the underlying index in a strong bull market rally.

The CBOE describes the PutWrite Index methodology as follows:

“The PUT strategy is designed to sell a sequence of one-month, at-the-money, S&P 500 Index puts and invest cash at one- and three-month Treasury Bill rates. The number of puts sold varies from month to month, but is limited so that the amount held in Treasury Bills can finance the maximum possible loss from final settlement of the SPX puts.”
Additional information about the PutWrite Index is available at the CBOE PutWrite Index splash page.
I mention put write strategies for four reasons:
  1. If we continue in a non-trending market, as I expect we will, this is an excellent investment approach
  2. Ennis Knupp just published a superb analysis of the PutWrite Index: Evaluating the Performance Characteristics of the CBOE PutWrite Index
  3. Put write strategies have historically outperformed the more widely utilized buy write strategies
  4. Properly implemented, a put write strategy is not as risky as most investors expect
At a minimum, readers should check out the Ennis Knupp paper and get a better sense of the essence of put write strategies. Those who expect the markets to do anything other than rally significantly might also want to start implementing that strategy on their own.

Note that while there are currently no ETFs that utilize a put write strategy, it is a volatility strategy that is practiced by hedge funds.


Anonymous said...

"Note that while there are currently no ETFs that utilize a put write strategy, it is a volatility strategy that is practiced by hedge funds."

There is one... ETJ


Anonymous said...

I used to be a huge fan of put writing. Now, I encourage it as a learning tool for rookie option traders, but gave up selling them for my own account some years ago.

To me, writing naked puts is only for investors who want to accumulate stocks over the years.

Traders are better served by selling put spreads. I know that significantly cuts profit potential, but to me it's worthwhile because of the big reduction in potential losses.

Eric said...

I should've done this in November. I have been Selling OTM Covered Calls against the FAS/TNA 3x ETFs. Now I am waiting for another VIX spike to do this again. But I see no reason why anyone who wants to get long in this market does not write puts. I have been seriously considered writing far OTM LEAPS on the next VIX spike. Today, I can get a 20% premium on a JPM Jan 2011 $5 Put. I imagine that would be considerably more if we have another VIX spike. JPM would need to drop over 80% to get there. I would pair this with a black swan, probably buying XLF Puts.

Anonymous said...

I absolutely agree with Mr. Luby. This is the time to sell puts. I have been trading options for 11 years now, and this is the best strategy that intuitively comes to me given the current market outlook. People who say this is a novice options trader strategy...well, lets just leave it to that.

Having analyzed data that I have been collecting over my 11 years of options trading, put writing has been a consistent performer (with the exception of last Oct. Swan). Hence, I agree 100% with Mr. Luby.

Options trading is mostly about one's market outlook and outlook on individual stock, other than technical understanding of the instrument.

Anonymous said...

can someone please explain why this strategy will work well in a downtrending market, according to Bill?

I am not very experienced with options but thought that volatility normally goes up when the market goes down, plus your directional bet loses money as well.

Bill Luby said...


"Well" is a subjective determination, but this strategy will generally outperform the SPX because the premium for selling options is retained. The puts will lose money at a rate similar to the index, but the income from the put sales will roughly provide the margin by which the put write strategy outperforms the SPX.



bzbtrader said...

Also note that the lastest Active Trader magazine ( has a feature article by Steve Papale on the merits of the Put/write strategy. I also mentioned the topic last week and included a link to the (free e-format) Future and Options Trader magazine:
where readers can download Pete Stolcers extensive article on the subject.

Bill Luby said...

Thanks for the heads up, Bob. I'm sorry I missed your post, as I have been fighting the flu and just got through the backlog on my feeds a few minutes ago.

I wonder why my Active Trader magazine is?



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