Why Put Writing Can Have High Correlation but Different Beta

Summary

The document asks how an at-the-money put-writing strategy can be described as having low equity beta when a cited analysis appears to show high correlation and a beta near one. The quoted rationale is that an at-the-money put has a delta around 0.5 and that put writers may collect higher premiums when demand for crash protection rises during market sell-offs.

The questioner attempts to reproduce the cited charts using monthly index levels and log returns, while omitting the subtraction of short-term Treasury bill returns. Their plots appear to show a beta close to one, leaving them uncertain whether their replication or interpretation differs from the original analysis. The document provides no answer resolving the discrepancy, and it does not include the underlying exhibit, calculation details, or the put-writing return series. It therefore highlights that delta, correlation, and regression beta are distinct quantities, but does not establish which measurement or data treatment explains the reported result.

Key ideas

• The question contrasts a claim of low beta for put writing with observed high correlation and beta near one.
• At-the-money put delta and equity beta measure different properties of a strategy.
• The questioner reports a replication based on monthly log returns that appears to show beta near one.
• The document does not provide enough data or an answer to resolve the apparent discrepancy.

Tags

# Beta of options based strategy


# Beta of options based strategy












This is probably a simple/dumb question, but I am not getting it.

As per GMO's recent Insight:

> Second, as can be inferred from Exhibit 1, put writing strategies have a low beta to the equity market` and they are able to collect elevated premiums during market sell offs due to enhanced demand for insurance in these periods. `This is mechanical: At-the-money put writing strategies have a delta of approximately 0.5, so a low beta to the market is guaranteed.

From that Exhibit, I can see pretty high correlation and close to 1 beta. How can a low beta to the market be guaranteed? how are the authors measuring the beta?

EDIT

Alex, as per your suggestions I tried to replicate the graphs and calculations. I took the monthly index values, generated log scaled returns and here are the equity curve and related statistics (skipped subtracting US 3M T-bills from both return series):

In log scale:

So, I think GMO's ATM 1M Put Writing strategy has a different profile. And as you can eyeball from the graphs, the original (GMO's) strategy has a beta close to 1. That was my initial concern.

Any further thoughts?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.