Graphing Performance of Put-Write and Buy-Write

I was pleased to see the strong response generated by Friday’s The Often Overlooked Put Writing Strategy, particularly in some of the comments at Seeking Alpha. A number of questions came up regarding the reasons why two strategies that are synthetically equivalent (i.e. share the same profit and loss graph), would have different performance characteristics. I cited the main reason for the performance delta as the skew that results from a tendency to price puts higher than calls, particularly during times of extreme market stress, when demand for puts often exceeds the demand for calls.

I am not sure that I can prove beyond a reasonable doubt the skew hypothesis in this space, but I did assemble two performance graphs that might help to inform any further discussion. Using the CBOE PutWrite Index and the CBOE BuyWrite Index as my source data, I have plotted the two indices from their 1988 inception (above) and from 2002 (below), when the indices begin to substantially diverge.

From the two graphs, I find it interesting that the put-write strategy begins to generate separation from the buy-write strategy during the 2002-07 bull market. As volatility increases during 2007, the put-write strategy continues to widen the gap, with the recent bear market having very little impact on the performance differential between the strategies.

Those who have any thoughts on the reasons behind the performance differential during different market cycles, please feel free to chime in. (Click charts to enlarge.)

[source: CBOE, VIX and More]

Comments

[xom-only:]

if correct with the strike of the put write one doesn't have to get into the water on friday and the brokerage doesn't get involved either, but then shouldn't those factors drive the charts in reverse. i don't know but i like verticle credit put spreads anyway.

Jan 12 04:44 PM

[ETF Wanderer_:]

I too found the difference a bit strange. Perhaps the CBOE should come out with a paper explaining them.

The mathematical obvious reason is that the volatility of the put prices are different from the call prices (assuming the two are liquid enough that their bid-ask prices are similar).

Jan 14 02:47 PM

[Marc Schnieder:]

The BXM Index might sell call options with different strike prices than the PUT Index does with put options.

This can be seen on the website of CBOE
www.cboe.com/data/BuyW...

On 10/16/2009 the BXM sold a call option with strike 1085 and the PUT Index sold a put option with strike 1080.

Therefore, until the settlement day in November the BXM will have more upside potential than the PUT and the PUT has more downside protection than the BXM.

Oct 28 10:27 AM