Strategy Series

Selling Cash-Secured SPX Puts

The strategy of selling S&P 500® Index (SPX Index) cash-secured puts offers participants exposure to the broad U.S. equity market, premium collection, and interest on collateral. This type of approach tends to perform best in neutral/range-bound to slightly bullish market environments. The strategy can make money in a down market only if the premium collected in a given month (on a percentage basis) exceeds the drop in the SPX Index at expiration. The cash-secured put-write strategy usually underperforms relative to a long index position in a strong bull market.

Assumptions -

For purposes of creating a hypothetical strategy, we will make a few assumptions:

  • Portfolio value at inception of $10,000,000 (USD)
  • SPX Index at 2,000 (index options multiplier = 100)
  • Notional Index value of one SPX Index contract = $200,000
  • No commissions/frictional costs

Example

  • Date: January 22
  • Index Value: SPX = 2,000
  • Strategy: Sell Fifty (50) Feb. (expires February 19th – or 28 calendar days later) 2000 SPX (ATM) strike puts
  • Premium: Collect 36 dollars per put (multiplier = $100). $36 (option value)*100 (multiplier) *50 (contracts) =Total premium collected $180,000 or (1.8% of Index value)
  • Implied Volatility – relatively high compared to past 24 months

Outlook: Ideally employed in a neutral/flat to slightly bullish macro market.

Results on Feb. 19

As you can see from the spreadsheet below, the cash-secured putwrite strategy designed to outperform in a month when the SPX Index moves up by less than the percentage of Index value collected in put premium. It also should outperform in all down markets (versus a passive long underlying Index) because of the put premium collected. Obviously there is risk inherent in EVERY market/strategy and the cash-secured putwrite strategy will show negative returns in any month where the SPX Index drops by a greater percentage than the premium collected from the ATM put sale. The cash-secured putwrite strategy will also underperform in a bullish month where the Index moves higher by a greater percentage than the put premium collected.


Maximum Profit: The potential profit (excluding transaction costs) is limited to the net premium received (plus any interest on Treasuries/collateral).

Maximum Risk: Risk is very substantial, because the Index could fall by far more than the put premium collected. Theoretically, it could go to zero. The ancillary risk is underperforming in a (very) bullish market. Using the above example, if the strategy collects 2.5% of index value as put premium (or 50 points) and then the SPX moves higher by 3% (or 60 points) at expiration, the PUT strategy will gain, but underperform the broad market in that month.

Impact of Volatility: An option writing (selling) strategy benefits from falling volatility and is hurt by rising volatility. Impact of Time: The time value portion of an option's total price decreases as expiration approaches. This is known as time erosion. Short put positions benefit from the passing of time with all else held constant.

**Risk of Early Assignment: NONE – SPX Index options are European-style exercise, meaning they can only be exercised/assigned at expiration.

**Potential Position Created at Expiration: NONE – SPX Index options are CASH-SETTLED.

Profit-and-Loss Diagram


Benchmark Indexes

Cboe offers the following benchmark indexes that track the performance of hypothetical portfolios that engage in cash-secured writing of index put options:

  • Cboe S&P 500 PutWrite Index (PUTSM Index) measures the performance of a hypothetical portfolio that sells at-the-money (ATM) SPX put options which are fully collateralized by cash reserves in a money market/T Bill account.
  • Cboe Russell 2000 PutWrite Index (PUTRSM Index) is designed to track the performance of a hypothetical strategy that sells monthly at-the-money (ATM) Russell 2000 Index (RUT) put options. The written Russell 2000 put option is collateralized by a money market account invested in one-month Treasury bills.
  • Cboe Russell 2000 One-Week PutWrite Index (WPTRSM Index) is designed to track the performance of a hypothetical strategy that sells an ATM Russell 2000 Index put option on a weekly basis. The maturity of the written Russell 2000 put option is one week to expiry. The written Russell 2000 put option is collateralized by a money market account invested in one-month Treasury bills. The WPTR Index rolls on a weekly basis, typically every Friday.
  • Cboe S&P 500 One-Week PutWrite Index (WPUTSM Index) tracks the performance of a hypothetical strategy that sells an at-the-money (ATM) S&P 500 Index (SPX) put option on a weekly basis. The maturity of the written SPX put option is one week to expiry. The written SPX put option is collateralized by a money market account invested in one-month Treasury bills.