naked put selling study

[Free Thinker]

http://www.cboe.com/micro/put/PUTIndexEnnisKnupp.pdf

The CBOE® S&P 500 PutWrite Index (ticker symbol PUTSM) systematically sells one-month, at-the-money put options on the
S&P 500 Index collateralized by a portfolio of Treasury bills. Since its 1986 inception, the PUT Index has earned higher returns
than the S&P 500 Index with lower volatility. Calculated by the Chicago Board Options Exchange, the PUT Index tends to
outperform in quiet and falling markets, and underperform in months when stock prices rise sharply.

Exhibit 2 shows the cumulative return to the CBOE S&P 500 PutWrite Index from June 30, 1986 until October 31, 2008. This
time period covers both bull and bear markets, with a variety of extremely rapid stock market declines, such as those seen in
October 1987, August 1998, September 2001, as well as the recent declines experienced in September and October 2008. The
systematic sale of put options over the entire time period would have earned an annualized return of 10.32%, before fees, with
an annualized standard deviation of returns of 9.91%. The risk and return of the PUT Index compare favorably to the S&P 500,
which earned annualized returns of 8.77% with a volatility of 15.39% over the same time period. The CBOE S&P 500 PutWrite
Index was announced in June 2007 and the track record of returns was generated using historical options prices, with the
assumption that each put option was sold at the bid price.

 

[Nanook]

Here are a few articles for those attempting to do this strategy themselves:

http://www.cxoadvisory.com/blog/external/blog6-27-07/

In summary, a strategy of systematically selling index put options generates on average large abnormal returns but suffers occasional very large setbacks when the underlying index plunges.

http://www.cxoadvisory.com/blog/external/blog9-10-07/

In summary, investors are willing to pay very high premiums, perhaps irrationally high, to insure against large losses in their stock portfolios. Sellers of this insurance can earn high average returns.

http://www.cxoadvisory.com/blog/external/blog4-23-09/

In summary, evidence suggests that individual index option traders tend to transfer wealth to institutional traders and market makers, but they can improve their probability of success by: (1) focusing on the short side of index options; (2) trading against trend; and, (3) practicing/learning.

 

[darwin666]

i love this line "
individual index option traders tend to transfer wealth to institutional traders and market makers"

basically. this is a BIG casino .and ., the house always wins.!

 

[rwk]

Quote from Nanook:
In summary, a strategy of systematically selling index put options generates on average large abnormal returns but suffers occasional very large setbacks when the underlying index plunges.

I was selling index straddles a few years back, and I did indeed generate outsized returns. But it was that risk of occasional very large setbacks that had me worried. I cannot watch the market 24 hours a day. Sometimes the market is closed, but news keeps happening.

I considered just selling calls, thinking an upside spike less likely, but I realized that runs can happen to the upside too. When/if OBL is killed or captured, there will be a big spike up that would be painful to shorts.

 

[jones247]

buy ratio long wings...

Walt

Quote from rwk:

I was selling index straddles a few years back, and I did indeed generate outsized returns. But it was that risk of occasional very large setbacks that had me worried. I cannot watch the market 24 hours a day. Sometimes the market is closed, but news keeps happening.

I considered just selling calls, thinking an upside spike less likely, but I realized that runs can happen to the upside too. When/if OBL is killed or captured, there will be a big spike up that would be painful to shorts.