Summary
This is the first follow-up entry for a new position that I have opened last month. Unlike the credit spreads (vertical call/put spreads, calendars, etc.) this is a long term position: I will perform a systematic Put Writing on the Spanish Ibex 35 index.
What is a Systematic Put Write?
This strategy is very simple, it consists of two operations every month:
- Sell one (or any amount) of Put Options with Strike almost at the money for the next month.
- Invest the nominal (value of the underlying of the options sold) plus the premium received in a risk-free fixed rate product.
Note: We will omit the second step, tough, as fixed rates are negative now in Europe.
What are the characteristics of this strategy?
- Sold options are cash-covered (you have the cash to buy the underlying).
- No adjustments are done.
- When the underlying falls, the strategy losses money but less than the underlying.
- When the underlying goes sideways and slightly upwards, the strategy gains money and beats the underlying.
- When the underlying rises sharply, the strategy gains money but greatly under-performs the underlying.
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| Put Write returns compared to SP500 and others from 1986 to 2008. Source Bloomberg and CBOE |
All these characteristics make the strategy less volatile than the market itself and has given better results over a long period of time. Take a look to the Ennis Kupp + Associates study from 2009 (published in CBOE) for deeper insights.
Why am I going to do it?
Since I am quite new to options trading, I usually have, at most, one position open (I have passed long time out of the market, too). Moreover, my bets are small, risking a bit more than 10% of my account on each trade (the maximal theoretical loss).
This means, that most of the capital in the account is not working, so a conservative, long term strategy that uses derivative products (options) seems to be the best addition to the other trades, which are more speculative and short term in nature.
Is there a need to do it myself?
In the US, there are some ETFs that replicate the PutWrite index created by The Chicago Board of Exchange (CBOE). These ETFs are very handy because they do all the work for you (no need to roll options every month) and you can modulate better how much money do you want to invest.
After checking with BME (Bolsas y Mercados Españoles) I have found no such ETFs for Europe or Spain, so I have decided to do it myself. Now the question is? What underlying should I use? Which PUT options should I sell?
Note: BME does have an index that mimics the PutWrite strategy: IPWT. The problem is that I have not found any vehicle to operate this index.
So far, I am familiar with the Euro Stoxx 50, DAX 30 and IBEX 35 options, the problem here is the exposure you get from selling one of each option contract:
- ODAX (DAX Options) use a 5X multiplier and the current value of the index nears 12.000 points, which means that your nominal is around 60.000€.
- OESX (Eurostocks Options) use a 10X multiplier and the current index value nears 3.300 points, which means that your nominal is around 33.000€.
- IBEX 35 options use a 1X multiplier and the current index value is around 9.300, which means that your nominal is around 9.500€.
That is the reason why, although their liquidity is not so good, I am using IBEX 35 options.
Movements and results so far
I started on August 22nd 2018 selling a 9500 September 2018 Put with the Ibex at 9540. This value will be used as base value from now on.
As you can see in the table above, I closed the September option slightly in the money and two days from expiration, which costed 43,65€. Then, I sold a new 9500 Put Option for October at 153,35€.
So, considering this first month, this is the comparison between the strategy and the Ibex 35 index:
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| Put Write vs Index 35 at September 19th 2018 |
Regarding October, these are the current parameters (break-even point is defined by the strike of the currently sold option minus the sum of the premium collected):
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