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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12 Responses to The CBOE PUT Index

  1. Jason 12/30/2010 at 7:37 AM #

    I’m actually curious as to the huge disparity in performance between the Buy Write Index and the Naked Put Index – according to the data I pulled from the CBOE website, both indices start at 100 on June 1, 1988. On March 31, 2010, the Buy Write index is at 774.49, while the Put Index is at 999.48. If writing a covered call and selling a naked put are the same thing, the difference has to come down to the leverage. According to the CBOE,
    “The number of SPX puts sold is chosen to ensure full collateralization. This means that at
    the expiration of the puts, the total value of the Treasury bill investment(s) must be equal
    to the maximum possible loss from final settlement of the put options, or N*K where N is
    the number of puts sold and K is the at-the-money strike price. ”
    Without doing any hard numbers, that intuitively looks like there is much less leverage then in the buy write index.
    Which really just goes to really reinforce your point on how important leverage is!

  2. Jason Ungar 12/30/2010 at 8:12 AM #

    A collateralized short put is the synthetic of a covered call, so, theoretically the PUT and BXM should have identical returns. The reason for the difference between PUT and BXM returns has to do with their expiration methodologies, not leverage. This is somewhat complex, but suffice it to say here that historically, it’s been better to be out of the market, as the PUT is, for the first two hours of trading on expiration Friday than long the S&P, as the BXM is. Also, the settlement value tends to be high, a bad thing for the BXM.
    Jason Ungar

  3. Jason 12/30/2010 at 8:21 AM #

    Ah ok, didn’t dig into expiration at all. Thanks for the clarification, and I’m surprised at the difference something like that makes.

  4. Mark Wolfinger 12/30/2010 at 8:53 AM #

    Thanks for the conversation.
    JU: I’m surprised that the methodology chosen (sit it out for two hours) differed from that of BXM. I would have thought that one reason for publishing PUT was for comparison purposes.
    JT: There is another major difference in methodology – and that’s the strike price of the option sold.
    By choosing the first OTM option, PUT always writes an option with a lower strike price than the call written with BXM. That alone offers better downside protection. Add volatility skew and the higher IV for the PUT, and that’s another edge for the PUT Index.

  5. Jason Ungar 12/30/2010 at 9:06 AM #

    The reason for the two hour hiatus is to ensure that the Special Opening Quotation value, against which the options are settled, is calculated. The SOQ uses the opening price of each of the S&P 500 component stocks, and one or two are often delayed. As far as the differential in the strikes, this is almost never more than 5 points, and the difference, therefore, in the IVs is unlikely to be great enough to have much of an impact. One way to prove this is to compare the daily returns for the two indices. If the IV differential was significant, there would be a smooth accretion in the outperformance, but in fact, you will find that the biggest disparities almost always occur on expiration, and are usually in the PUT’s favor.
    Jason Ungar

  6. Mark Wolfinger 12/30/2010 at 9:39 AM #

    Jason U,
    1)I envision SPX trading near 1098 and the put being written as the 1075. That makes for a 25-point difference.
    I may be wrong, but I don’t remember that these 10-point strikes were always available – or on those occasions when they were listed for trading – that they were listed prior to the following Monday.
    Weren’t the strikes always 25 point apart – some years ago?
    2) Doesn’t your final sentence suggest that this would be an excellent strategy for Weeklys? Sell the puts and buy-write the calls? In other words, an expiration collar. I suppose the wide markets preclude that play.
    Thanks for the insight

  7. Michael James 12/30/2010 at 10:04 AM #

    Hi Mark,
    I’m no stock option expert, but every time I try to look at option-based strategies puts seem very expensive, especially longer-term puts. If this is right, then a strategy of selling puts would make money. But the temptation to be highly leveraged would leave people seriously exposed to a big market downturn. I’ve never acted on this observation.

  8. Mark Wolfinger 12/30/2010 at 11:00 AM #

    Hello Michael,
    That is the problem with buying puts – they feel so costly.
    You hit the crucial point. If selling puts is so good, then why not sell many of them and get overleveaged?
    That’s the temptation that must be avoided.

  9. Jason Ungar 12/30/2010 at 2:41 PM #

    You are absolutly right about there being a time when the BXM and PUT option strikes were 25 points apart, and prior to November 1992, the options settled at the Thursday close. For the majority of their histories, however, the BXM and PUT strikes have been relatively close, and this is where my analysis, I believe, holds sway.
    On your second point, I think a weekly collar strategy might be interesting, as would a straight weekly BuyWrite or PutWrite. They would probably be more volatile, but would certainly have more Theta capture potential. Liquidity could be a concern now, but that will inevitably increase. Thanks again for the great post.
    Jason Ungar

  10. Mark Wolfinger 12/30/2010 at 4:13 PM #

    Jason U,
    I would never trade Weeklys myself. Far too much negative gamma. But the collar would take advantage of the expiration ‘bonus’ – and overall results would depend on just how bullish expiration weeks are. After all, the collar is a delta positive spread. [Equivalent to selling the put spread]
    The straight write is a bit too much for me, but may be acceptable for aggressive traders.
    Thanks for sharing.

  11. Edgardo 12/31/2010 at 4:35 AM #

    ” Sell the puts and buy-write the calls? In other words, an expiration collar”
    Wouldnt collar be buy-write the calls, and buy the put?
    Hope you an excellent 2011

  12. Mark Wolfinger 12/31/2010 at 8:15 AM #

    Wow, That’s quite an error I made.
    Sure. That trade I mentioned would simple be doubling up. Equivalent to two buy writes or two put sales.
    Some call that the covered straddle.
    Thank you