Sell in May and Go Away Alternatives (Part 3 – PUT)

Recently I took a look at the old saying, “Sell in May and go away” which is an old saying kicked around on Wall Street that says investors are best off exiting the stock market from May to October each year.  This saying, which will get several mentions on the business networks in the next few days, means investors would do well to exit at the end of April and get back into the stock market on November 1st each year.  I like to verify such things and it turns out exiting the  market for six months each year does outperform buy and hold over the long term (or at least for the last 20 years).

I decided to substitute different strategies over the six months that the sell in May strategy would have you out of the market.  The three strategies that showed some improvement over exiting the market are represented by strategy indexes that were created by CBOE to track systematic option selling strategies using options on the S&P 500 (SPX).  Tuesday night I showed that over the last twenty years the CBOE S&P 500 Buy-Write Index (BXM) did slightly better than being in cash.  In Wednesday’s blog I demonstrated the historical performance of the CBOE S&P 500 2% OTM Buy-Write Index (BXY) also did better than being in cash and BXM as well.  Tonight implementing the strategy represented by the CBOE S&P 500 Put-Write Index (PUT) versus going to cash in demonstrated.

To check out the first blog on BXM –

To check out part two discussing BXY –

The strategy behind the PUT index shows the potential performance of a portfolio that is in cash (represented by one and three month Treasury Bill rates) and consistently sells at the money S&P 500 put options against this portfolio.  The strategy is implemented on the third Friday of each month which is expiration for standard AM settled SPX option contracts.  The full explanation can be found at

The following chart shows the results of $100 invested in three different systematic methods from April 15, 1994 through April 18, 2004.  Those dates were chosen since they are the dates that new SPX options are sold systematically for the BXM, BXY, and PUT Indexes.  For a clear picture I break out each of these ‘strategies’ as well –

SPX TR – total return (price appreciations plus dividends) of just buying an S&P 500 portfolio.

SPX + PUT – total return of the S&P 500 from October expiration to April expiration + return of the CBOE S&P 500 Put-Write Index from April expiration to October expiration.

SPX + Cash total return of the S&P 500 from October expiration to April expiration + six month certificate of deposit rate from April expiration to October expiration.

PUT Performance


The chart above shows the growth of $100 following each of the three potential methods (if you include ignoring it) for approaching the “sell in May” market philosophy.  Note that the SPX + PUT strategy moves somewhat in sync with the return of the SPX + Cash approach but does out-perform over time.  The periods of underperformance arise when the stock market comes under pressure.  Without taking transaction costs into account a portfolio that is in the S&P 500 from October expiration through April expiration and then implementing the PUT strategy for the other six month period results in $100 growing to $879.32.  Going to cash at April expiration and then buying back into the stock market at October expiration results in a $100 portfolio growing to $780.58.  Coming in third is the S&P 500 total return where $100 grows to $728.76 over this 20 year period.

When I used BXM as the substitute for cash the result was $100 growing to $802.58 and the result for BXY was a $100 portfolio growing to $846.43.  PUT clearly beats both of these strategies as the cash substitute with returns resulting in $100 growing to $879.32.  Maybe going to cash has been a good strategy from May to October in the past, however, maybe as an add on selling SPX puts should be part of the plan as well.