Special thanks to Daniel Rock for reviewing this before publication and helping address some of my questions. I guess we could call this a primer following my prior posts in options strategies, mostly because at least a few of you follow me for options and vol-related content, and I’ve been lacking on that front lately.
"While performance of the buy and put-write (and even iron condor variant) tended to be better than index returns pre-2008, the performance has suffered in recent years largely due to option mispricing."
Why is it caused by option mispricing? I always found it strange that the sharpe ratio of selling ATM puts pre-2003 (and to an exent 2003-2009) plainly exceeded the sharpe ratio of being invested in the market. I would say that if anything, the current regime we are in, where IV is depressed and there is easy availability of short vol products, is more efficient than the previous ones. Even with IV behaving like it has for the last decade, it's tough to improve your sharpe ratio much by buying puts.
"While performance of the buy and put-write (and even iron condor variant) tended to be better than index returns pre-2008, the performance has suffered in recent years largely due to option mispricing."
Why is it caused by option mispricing? I always found it strange that the sharpe ratio of selling ATM puts pre-2003 (and to an exent 2003-2009) plainly exceeded the sharpe ratio of being invested in the market. I would say that if anything, the current regime we are in, where IV is depressed and there is easy availability of short vol products, is more efficient than the previous ones. Even with IV behaving like it has for the last decade, it's tough to improve your sharpe ratio much by buying puts.