Horizon Kinetics Discusses Cash-Secured SPX Put Selling at CBOE RMC

At the 30th Annual CBOE Risk Management Conference this week in Florida, Doug Kramer, Chief Executive Officer of New York-based Horizon Kinetics, appeared on a panel on “Historical Performance of Options-Related Strategies.”

Doug noted that the CBOE S&P 500 PutWrite Index (PUT) sells one-month  cash-secured put options on S&P 500® (SPX) that are slightly out of the money, and that the PUT Index has had strong risk-adjusted returns over the past 25 years, due in part to the fact that the implied volatility for SPX options often is higher than realized volatility.

DOES THE VOLATILITY SKEW FAVOR THE SELLING OF OUT-OF-THE MONEY SPX PUT OPTIONS?

Doug noted that his firm often sells cash-secured put options on S&P 500® (SPX) options that are out-of-the-money, and he noted that on the blue SPX curve in the Volatility Skew chart below, the estimates for 30-day implied volatility were around 9.8% for 5%-out-of-the-money SPX call options, but a much higher 16.1% for  5%-out-of-the-money SPX put options.   Doug said that the higher implied volatility for out-of-the-money SPX put options can provide a big advantage for his firm.

Vol skew for SPX VIX Mar 7

mm Bar charts PUT Feb 2014

CBOE does not provide recommendations or solicitations for funds, but if you are intrigued by the information in this blog, you might explore the prospectuses and performance of a couple mutual funds that are reported to use options – the Kinetics Multi-Disciplinary Fund (KMDNX) and Kinetics Alternative Income Fund (KWINX).