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The CBOE PUT Index

How many times have you heard it:

Don't sell naked puts.

Ans especially never sell naked puts in a falling market.

The CBOE S&P 500 PutWrite Index follows a portfolio that ONLY sells naked puts.

From the CBOE website:  "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."

In our terminology, these are cash-secured puts, with every penny collected from the sale of the puts being invested in Treasury Bills.

The results are rather interesing, and I've mentioned this topic previously.


Jason Ungar at Gresham Investment Management, one of the developers of PUT, publishes a monthly update on the perfromance of 'his' index. You may request a copy via the link. He is very pleased at how well his 'baby' performs.


A recent blog post by Don Fishback, 12/07/2010, puts its performance into perspective:

CBOE PUT Index at a New All-Time High

"Wow, did I miss this!  The CBOE’s PUT Index hit a new all-time high on November 4, eclipsing the peak in May 2008.  It has since extended that rally even further.

Who says selling puts is more risky than buying stocks?!

It’s not the put that’s the problem.  It’s the excessive leverage some people use, and not knowing what to do in the unlikely event that something goes wrong that gets put sellers in trouble.

I’ve got no problem with leverage.  It’s just that there can be too much of a good thing.  And you have to have an exit strategy BEFORE you put the trade on."


Don offers the classic and correct warnings: Don't use too much leverage (that means do not sell ten 20-delta puts as a hedge against being short 200 shares of stock). Have an exit strategy planned in advance. Another piece of advice that emphasizes the importance of writing a trade plan.  Don't be stubborn.  It's impossible to win every month when following this strategy.  However, you can be a winner by exercising good judgment when managing risk.

Followers of PUT have no such concerns.  The methodology is written in stone.  Sell the puts and don't do anything prior to expiration.  Those results have been impressive over the years. However, you and I e not managers of an Index fund.  We use our own cash and must pay attention to risk.

As individual traders, we are not married to a single technique.  We can, and should, manage risk.  By keeping risk in line, we may underperform the CBOE S&P 500 PUT index, but we will never incur a humongous loss.  And that's far more important.

And the evidence tells us that selling naked puts isn't so bad after all – to be more specific it has not been so bad for the lifetime of the PUT index.  And that lifeteime began in mid 2007.  It's a very short lifetime, but it did include the massive declines of 2008-2009 and has not only survived, but is trading at new highs.  Nice index.  Thanks JU.

Addendum from Jason Unger: " Just one thing, the CBOE has backtested the PUT to July 1986; and even including the 1987 crash, it outperforms the S&P 500 in just about every metric."




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