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

Author

Listed:
  • Pratish Patel

    (California Polytechnic State University)

  • Andrew Raquel

    (California Polytechnic State University)

  • Savannah Chadwick

    (California Polytechnic State University)

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.

Suggested Citation

  • Pratish Patel & Andrew Raquel & Savannah Chadwick, 2024. "The cash-secured put-write strategy and the variance risk premium," Journal of Asset Management, Palgrave Macmillan, vol. 25(1), pages 31-50, February.
    • Handle: RePEc:pal:assmgt:v:25:y:2024:i:1:d:10.1057_s41260-023-00333-0
    DOI: 10.1057/s41260-023-00333-0
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    More about this item

    Keywords

    Options; Buy-write; Put write; Variance risk premium; Derivatives; Portfolio;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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