Evaluating Short Puts Against a Momentum Strategy
Summary
The document considers whether signals from a long-only equity momentum system could be used to sell puts. One response suggests choosing a high-momentum stock using a risk-adjusted return measure and selling a near-the-money put with a later expiration, though it provides no supporting tests or detailed selection rules.
A second response explains that a short put has the same payoff as a covered call with matching terms: gains are limited while losses remain exposed to a substantial decline in the underlying. It argues that buying options may better fit a robust directional signal because losses are limited while gains can grow. To assess either approach, the responses recommend collecting historical option data and evaluating trades triggered by the equity system, or recording option chains when signals occur and when positions close. These are starting points rather than a complete research protocol; the document gives no results and does not address transaction costs, volatility changes, assignment, or sizing.
Key ideas
- A momentum signal can be evaluated as a trigger for selling puts, but the idea requires option-level performance data.
- A short put has a payoff equivalent to a covered call with matching terms.
- Short puts limit upside while retaining substantial downside exposure.
- Option-chain snapshots at entry and exit can support a forward evaluation of the strategy.
- Historical analysis should compare option outcomes with the underlying momentum signals.
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Full text
# Testing Option Strategy # Testing Option Strategy I have a long only momentum system that has back tested well and live results have been ok. I would like to see if I can use these signals to sell Puts to see if it improves results. Not looking for anything too fancy, does anyone know how I could start looking in to this? Thanks ## Answer by BoyInDaBox89 (score 0) https://quant.stackexchange.com/a/59792 I have been also thinking about the same. Best possible way I could think of selling ATM around pivot of your top momentum stock at least 1 month forward in this way you can reduce some uncertainty. But do pick the top momentum stock after you calculate risk adjusted return value. Else you might get trapped. Good Luck! ## Answer by Bob Baerker (score 0) https://quant.stackexchange.com/a/59801 Short puts are synthetically equivalent to covered calls (same series). They both have an asymmetric risk/return profile. You limit the upside while retaining all of the downside risk. That translates into a poor R/R profile. Two old expressions about selling covered calls (or short puts) are: - It's like collecting pennies in front of a steamroller - Most of the time you eat like a bird and sometimes you sh*t like an elephant If your momentum system is robust, you should be buying puts or calls, affording yourself the potential for large gains and limited losses. > Not looking for anything too fancy, does anyone know how I could start looking in to this? (1) Obtain historical data and note the option performance based on your equity momentum system. (2) Or going forward, capture the option chain on the day that your system indicates that you should go long (or short) and then capture the option chain on the day that your system indicates that you should sell to close (or cover your short). Then evaluate the option performance.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.