Using Put-Based p-Index Risk to Guide Stock Strategies
Summary
This paper uses European put options to construct a p-index risk measure for evaluating stock investment strategies. The index represents the insurance cost per insured dollar needed to ensure a minimum return on a specified future date. The study applies it to the SSE 50 and S&P 500 over 2018–2023, comparing fair-price, momentum, and contrarian approaches across holding periods and, for Chinese stocks, economic sectors and sentiment regimes.
The reported results vary by market and strategy. For the SSE 50, fair-price strategies perform best at one-week and one-month horizons, and materials stocks lead the reported sector returns. At a one-week horizon, p-index-based contrarian and momentum approaches rank differently according to stock efficiency and sentiment conditions. For the S&P 500, efficient stocks show continued momentum while inefficient stocks show mean reversion; the reported leading strategies have similar annualized returns. These findings are specific to the stated period, markets, and strategy definitions. The document does not provide uncertainty estimates or establish that the rankings persist beyond the sample.
Key ideas
- The p-index uses European put prices to estimate the cost of insuring a minimum future return.
- The study compares stock strategies in the SSE 50 and S&P 500 during 2018–2023.
- Reported Chinese market results differ across holding periods, sectors, and sentiment regimes.
- In the reported US sample, efficient stocks sustain momentum while inefficient stocks exhibit mean reversion.
- The strategy rankings are sample-specific, and the supplied summary gives no uncertainty estimates.
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Full text
# Stock Investment: The p-index Approach # Stock Investment: The p-index Approach This paper has used European put option to construct the p-index risk measure to evaluate the performance of different investment strategies in China's SSE 50 index and the US SP500 index during 2018-2023. The p-index measures the insurance fee for each insured dollar to guarantee that the asset achieves at least a delta rate of return on a specified future date. It is found that with the fair price strategy, one-week and one-month holding periods can earn more, and among seven economic sectors, materials sector stocks generated highest annualized rates of return: 11.04% (one-week period), 11.93% (two-week period) and 10.18% (one-month period). With momentum and contrarian strategies of one-week holding period, the p-ratio-efficient-contrarian strategy produced the highest annualized rate of return (9.97%), followed by the p-index-inefficient-momentum strategy (9.01%) and the p-index-efficient-contrarian strategy (6.48%), the MCIRS method employing the p-index consistently delivered higher returns than its beta-based approach, and efficient (outperforming) stocks failed to sustain their momentum while inefficient (underperforming) stocks exhibited no mean reversion. It is also found that the p-index-efficient-contrarian strategy outperformed in low-sentiment (low-volume) regimes, while the p-index-inefficient-momentum strategy outperformed during high-sentiment (high-volume) periods. For the five hundred stocks of the US S&P 500 index during 2018-2023, it is found that efficient stocks sustained their momentum while inefficient stocks exhibited mean reversion. The p-index-efficient-momentum strategy produced the highest annualized rate of return (3.69%), followed by the p-ratio-inefficient-contrarian strategy (3.67%) and the beta-efficient-momentum strategy (3.48%).
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