The put writing strategies can deliver equity-like returns while the distributions from put selling have done no worse than long-only equities, according to GMO’s Global Equity Insight.
The study compared the payout profile of put writing strategies to long-only equities and found that put writing was able to support regular payouts and, in cases of down or flat markets, may also allow for higher dollar payouts.
This was because the put writing strategy, which was characterised typically by lower volatility and shallower drawdown than long-only equities, allowed capital to compound at a higher rate for investors with long term horizons.
Additionally, put writing strategy was particularly attractive in an environment such as today’s, which was characterised by stretched valuations.
According to the study, over multiple market cycles put selling allowed for greater distribution and displayed no meaningful capital erosion compared to long-only equities.
“Broadly, this allowed for a smoother profile of distributions,” the study said.
“It stands to reason that distributions from put selling have done no worse than long-only equities and in some cases, especially in Europe, have performed materially better.”
The report also said that if the path of an equity index was similar to that of the Euro Stoxx over the past 15 years, then distributions would likely be higher.
“We don’t claim that this result is always guaranteed, but seems to hold outside of extreme and prolonged bull markets.”