A recent Options Jive from May 17th, 2016, “Selling Puts vs. Buying Stock”, examined the pros and cons of buying stock versus selling puts. Since the bottom of the S&P 500 in March 2009, we have seen a strong 7 year bullish run and stocks have roughly tripled. How would a strategy of selling puts performed versus buying stock?
We chose 30 well known stocks and used those as our underlyings for our study. The time period was from 2005 to the present. We used two model portfolios of $250,000. At the beginning of each month, we compared buying 100 shares of each stock to selling the at-the-money (ATM) puts with 45 days to expiration (DTE) in each of the 30 stocks. We closed both positions on the put’s expiration date.
An 11 year graph compared the long stock to selling the ATM puts. The graph showed that the 2 strategies performed similarly. A table displayed the quantitative results and compared buying 100 shares to selling ATM puts. The table included the amount of profitable trades, the Standard Deviation of the trade P/L as a percentage of the stock price, the largest peak-to-trough portfolio drawdown and the average downside buffer (stock price minus put credit). The table showed that the short put strategy performed significantly better as far as probability of profit (POP) and peak to trough portfolio drawdowns plus there was a 4.5% downside buffer to the stock price.
For more on related topics see:
Market Measures from March 23rd, 2015: “POP Improvement | Long Stock”
Best Practices from July 27th, 2015: “Synthetic Positions”
Market Measures from August 26th, 2015: "Taking Losses | Short Puts"
Market Measures from September 1st, 2015: "Short Puts | Managing Winners & Losers"
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