The cash-secured put-write strategy and the variance risk premium

Pratish Patel (), Andrew Raquel () and Savannah Chadwick ()
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Pratish Patel: California Polytechnic State University
Andrew Raquel: California Polytechnic State University
Savannah Chadwick: California Polytechnic State University

Journal of Asset Management, 2024, vol. 25, issue 1, No 3, 50 pages

Abstract: Abstract A cash-secured put-write (PUTW) strategy involves writing an at-the-money put option and setting aside enough cash to buy the underlying. Empirically, the PUTW returns outperform the returns predicted by the traditional one- three- and five-factor models. We explain the outperformance. A model where the market is subject to disasters generates a Variance Risk Premium (VRP), which reflects information about both the risk aversion and the impact of disasters. VRP, when added to the market factor, accounts for the PUTW outperformance. This factor also explains abnormal returns for other derivative strategies.

Keywords: Options; Buy-write; Put write; Variance risk premium; Derivatives; Portfolio (search for similar items in EconPapers)
JEL-codes: G11 G13 G17 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s41260-023-00333-0

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