THAT is an argument I can get behind -- effort and tax exposure don't justify the return, at least for some people. I don't have anywhere near 70 trades going at any one time, and for those of mine that are B&H (AZO, MCD, PFE, WMT, etc.), I am happy to sell OTM calls. I haven't had any problems so far, but we're in a bull market. Backtesting indicates it's a winning proposition, though. We'll see.
Selling out of the money puts with low risk
- Thread starter shortbleu
- Start date
Good point, that's true in practice.
FWIW though, I think the difference in performance of PUT/BXM comes from the difference in strikes. BXM is one strike above prevailing SP and PUT is one below. Looking at the CBOE data, PUT outperforms on down days and vice versa. And to jimmyjazz's point earlier in the thread, BXY is a further otm strike.
Mav also makes a good point with etfs/funds. There's PBP/BWV which are etfs for the SP and DPO for the dow - and investors can even trade them against each other
His idea is to highlight wild risks, much like legislators and personal-injury lawyers, point out anecdotes of financial crisises, market it to idiots and rape them with fees. Long tails is exposure to something unquantifiable, like the endless opportunities offered by spammers or late-night paid-TV touts. Sooner or later you're bound to strike gold, right?
Quote from Soon2Bgreat:
Good point, that's true in practice.
FWIW though, I think the difference in performance of PUT/BXM comes from the difference in strikes. BXM is one strike above prevailing SP and PUT is one below. Looking at the CBOE data, PUT outperforms on down days and vice versa. And to jimmyjazz's point earlier in the thread, BXY is a further otm strike.
Mav also makes a good point with etfs/funds. There's PBP/BWV which are etfs for the SP and DPO for the dow - and investors can even trade them against each other
Yeah. It has to do with skew in the puts. I was surprized that 1 or 2 strikes mattered that much of the long term.
Alright, let me try this again. Yes, your volatility is lower with the short put because you are laying off all the "upside" volatility that you actually WANT to have. If you sold puts on TSLA when it was $30 and locked in a measly $2 while the stock runs to $150, your short put has MUCH less volatility, but not in a good way! And before you talk about how rare that move is, all it takes is one 100 pt move like that to make up for 50 different trades where the stock doesn't even move at all. Trust me dude, it's a mathematically inferior strategy.
Most of the studies done on this type of strategy are done with an index and yes, an index will probably perform the most efficiently because indices in general have the least upside potential. So it only makes sense that if you are giving away the upside, you want that upside to be as small as possible.