Ran into this curious article - about weekly options vs. somewhat longer term, in this case 1 month. To me this was counterintuitive - I thought that weeklies would do better. I thought they would involve more work, but their time value would dissipate much faster. The results (albeit, on put writing indices, not like the well picked individual stocks people use on this thread) - are different. LTBH-ing SPX returned more than either option strategy, but with higher volatility and risk.
HVPW still manages to pay over 9%, but the stock price is still considerably lower than where it was in the first half of last year.
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Selling Weekly Options VS Selling Monthly Options
We recently released a white paper that discusses choosing what strike and tenor of option is best. Our general conclusion was that when selling options, shorter-dated expirations are better (the paper can be found by clicking on the "learning" menu on the top left of the main menu page). I reached this conclusion by decomposing the returns of some simple option strategies (specifically covered calls and cash secured puts) into directional and volatility components.
A recent paper by Oleg Bondarenko, " An Analysis of Index Option Writing with Monthly and Weekly Rollover" looks at a specific case, by examining the actual returns of two put writing indices. The CBOE lists two different put writing indices: the CBOE S&P500 PutWrite Index (PUT) and the CBOE S&P500 One-Week PutWrite Index (WPUT). Each is long treasury bills and sells S&P500 index puts, monthly ATM puts in the case of PUT and weekly ATM options for WPUT.
Clearly the premium of a one week option is lower than that of a one month option (option premium scales with the square root of time so, all things being equal, a four week option will be worth twice what a one week option is) but we get to collect the premium more often. In fact we will collect about twice the premium for selling the one week options. So the open question is, how much of the premium do we get to keep in each case?
From January 2006 through to December of 2015 the results are:
So in terms of returns, WPUT performs the worst over this period but is the least risky. Although the Sharpe ratios for all three strategies are very similar, WPUT has a significantly lower draw down. This is almost certainly a re-balancing effect. WPUT just won't be holding onto bad positions as long as the other strategies. The lower returns are due to the fact that for almost all of the time under consideration the one week volatility has been below the one month volatility. This is the same reason VXX has decayed so much since its listing. So we didn't actually get twice as much premium for selling the one week options (actually we got 1.63 times as much).
The lower risk from selling weeklies is very appealing. But maybe we can get the best of both worlds by flipping between monthlies and weeklies depending on the shape of the volatility term structure?
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Posted on Mar 24, 2016 11:10:26 AM by Euan Sinclair in FactorWave Blog |
