What is the CBOE PutWrite Index (PUT) and how does it behave?

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AcadiFi · Accepted Answer

The CBOE S&P 500 PutWrite Index (ticker: PUT) is a benchmark for a systematic cash-secured put-writing strategy on SPX options. Mechanics:

- Hold T-bills as collateral.
- Sell (write) 1-month ATM SPX put options on the standard expiration.
- Collect premium; if SPX above strike at expiry, put expires worthless and strategy keeps premium.
- If SPX below strike, accept assignment (loss = strike - SPX spot + premium).
- Roll monthly.

**Economic interpretation**: equivalent to being long SPX + collecting volatility risk premium. Options are systematically overpriced relative to realized vol; put writers harvest that premium.

**Risk-return profile (1986-2024 approx.)**:
- Annualized return: ~8.5% (similar to S&P 500).
- Volatility: ~10% (vs 15% for SPX) - lower due to premium cushion.
- Sharpe ratio: ~0.6-0.7 (vs 0.4-0.5 for SPX).
- Max drawdown: ~-33% during 2008 (vs -50% for SPX).
- Upside capture: ~50-60% (caps upside at strike + premium).
- Downside capture: ~70-80% (cushion from premium).

**When PUT outperforms**:
- Sideways or slightly down markets (premium harvested, no assignment loss).
- High implied vol environments (richer premium).

**When PUT underperforms**:
- Strong bull markets (upside capped).
- Sharp crashes (full downside like long SPX minus premium cushion).

**Compared to BuyWrite (BXM)**: PUT has structurally similar returns to BXM (covered calls on SPX) due to put-call parity. Both harvest vol risk premium.

**Fund implementations**: PBP ETF (PowerShares S&P 500 BuyWrite), WisdomTree CBOE S&P 500 PutWrite (PUTW), various mutual funds.

CFA Level III usage: often presented as an alternative to fixed income with equity-like returns but bond-like vol - attractive in low-rate environments.

Caveat: tail risk is real. A put-writer is short vol and short gamma; in 1987, 2008, 2020, PutWrite had acute losses.

What is the CBOE PutWrite Index (PUT) and how does it behave?

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