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Portfolio Allocation for Puts

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

We previously studied the concept of combining the strategies of managing winners and managing early (exiting at 21 Days To Expiration (DTE)) in a series of Market Measures on Iron Condors. That was inspired by a series on applying the combined strategies to Strangles. Today’s study examines the strategy applied to short Puts. Shorting Puts is a bullish strategy and this has been a bull market. We went back far enough though to include the financial panic of 2008-2009 so our study period was more balanced. Will shorting Puts combined with managing winners and managing early outperform buy-and-hold, and if so, by how much?

Our study was conducted in a $1 million dollar margin account in the SPY using data from 2005 to the present. We chose the options expiring closest to 45 DTE. We sold the 1 Standard Deviation (SD) / 16 Delta Put. We opened a new position only after closing the old one. A short Put strategy works well in Bull markets but obviously has downside risk. The risk is mitigated by the premium received.

An 11 year results graph compared a buy-and-hold S&P strategy to managing earlier, managing winners and a combination of the two. The graph showed that the combination of strategies nearly doubled the profits of a passive approach. Tom noted that ”the real takeaway was how small the drawdowns were with the combined approach and the relatively low portfolio volatility.”

For more information on Portfolio Allocation see:

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study on portfolio allocation when using a strategy of shorting Puts.

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