Option Writing: Using VIX to Improve Returns

Abstract

Buy-write and put-write strategies have been shown to match market returns with lower volatility, resulting in higher risk-adjusted performance. The strategies benefit from the fact that the implied volatility of options is generally higher than actual realized volatility. In this article, we show that this premium is higher at elevated levels of implied volatility (as represented by the VIX index level). Based on this finding, we propose a simple conditional strategy in which one sells options at elevated levels of the VIX. Using data from 1990 through 2018, we find that this conditional strategy outperforms both the market and continuous option-selling strategies on an absolute and risk-adjusted basis.