Put-writing: equity exposure with an income cushion
Selling protection against falling markets is one of the oldest ways to earn a premium. Understood properly, it sits somewhere between bonds and equities.
The mechanism
A put option gives its buyer the right to sell a security at a fixed price, the strike, before a set date. The seller of the put takes on the obligation to buy at that price and is paid a premium for doing so, much as an insurer is paid for cover.
Take a share trading at 100. An investor sells a put with a strike of 95 and receives a premium of 2. If the share stays above 95, the option expires and the investor keeps the 2. If the share falls to 90, the investor must buy at 95: a loss of 5 on paper, reduced to 3 by the premium already received.
From a single trade to a strategy
Systematic put-writing repeats this in a disciplined way: options are sold on a diversified basket of shares or indices, usually with one to three months to expiry and strikes set below the current price, and the positions are rolled as they expire. The aim is to collect, over time, what is known as the volatility risk premium. Investors have historically paid more for protection than the volatility that later materialised, and the seller of that protection is compensated for bearing the risk.
Where it sits
Because the investor is only obliged to buy if prices fall below the strike, the portfolio carries only part of the market’s movement. Income arrives whether markets rise, stay flat or fall moderately. Published index histories, such as the Cboe S&P 500 PutWrite Index, show long-term returns broadly comparable to equities with noticeably lower volatility, while also showing sharp losses in severe sell-offs.
Source: Cboe Global Markets. Index histories are shown for illustration and do not represent any GYRA SA portfolio.
Under stress
The strategy behaves in a particular way when markets panic. Existing puts can be exercised at a loss, which is the cost of the insurance. At the same time, the premiums available on new options rise sharply with volatility, and the income from those new positions helps rebuild the cushion. In 2022, when the usual diversification between equities and bonds failed, rising volatility meant rising premium income.
The risks
Sudden falls. A sharp, fast decline is the main risk: the seller of protection pays out exactly when markets are weakest.
Limited upside. In strong rising markets, the strategy will lag a portfolio fully invested in equities.
Selection. Writing options on weak or deteriorating companies has historically produced poor results. Quality, balance sheet strength and the price of the volatility itself matter.
Liquidity. Enough cash or collateral must be held to meet every obligation, which affects how the rest of the portfolio is managed.
In context
Put-writing is neither a substitute for bonds nor a free source of income. It is a way of holding equity risk with a different profile: steadier income, less participation in strong rallies, and a defined exposure to sharp falls. Whether it has a place in a family’s portfolio depends on its objectives, horizon and liquidity needs, and it is only ever assessed as part of the overall allocation.
Sources: Cboe Global Markets (VIX and Cboe S&P 500 PutWrite Index). The numerical example is illustrative. This article is provided for information purposes only. It does not constitute investment advice, an offer, or a recommendation to buy or sell any financial instrument or to adopt any strategy. The views expressed are those of the author and of GYRA SA at the date of publication and may change without notice. Past performance is not indicative of future results. Data sourced from third parties is believed to be reliable but has not been independently verified by GYRA SA.