Ratio Put Write Explained

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Put-Write ETFs as Alternative Income Options

In a previous post, we covered buy-write strategies and related ETFs, which are currently offering very attractive yield levels. Today, we’ll look a bit further into the buy-write’s cousin, the put-write.

What is a Put-Write Strategy?

Like buy-writes, put-writes also earn income by writing options to collect premiums with the hope that the options will expire worthless. Unlike a buy-write, where the call is covered by the stock, put-writes either write naked puts or must maintain a cash account to cover the payout if the put is exercised.

Relationship to Buy-Writes

There is a fundamental relationship between put-writes and buy-writes that can be seen by rearranging put-call parity:

where P, C, and S are the put, call, and stock prices, respectively, K is the strike price, and D is the discount factor to maturity. This assumes no dividends and European options, but the intuition is still helpful.

The left-hand side of the equation is the put-write and cash invested to cover the strike price at maturity (long a zero-coupon bond); the right-hand side is the buy-write written at the same strike. From this we can equate an out-of-the-money (OTM) buy-write strategy to a cash-secured in-the-money (ITM) put-write. Likewise, we could say that a cash-secured OTM put-write is equivalent to an ITM buy-write.

In reality, the relationship is more of a similarity than an equivalence. Puts and calls are often American options, which can be exercised before maturity. So even though writing a covered call (or cash secured put) that is ITM may have similar mechanics to writing an OTM covered call (or cash secured put), the OTM option is generally preferable to reduce the risk of early exercise.

Put-Write ETFs

…or more appropriately, ETF. Currently, the only ETF available for put-write strategies is the U.S. Equity High Volatility Put Write Index Fund ETF (HVPW). It has $52 million in AUM and an expense ratio of 95 bps. Every two months, it sells 15% OTM cash-secured puts on 20 of the largest stocks with the highest implied volatility. The idea is that investors will pay a premium for insurance on these stocks, allowing the fund’s management to target a 9% annual distribution, a goal that the ETF has been able to achieve since its inception in Feb. 2020.

Many of HVPW’s recent puts have been sold on the large U.S. airlines and other travel related stocks and companies in technology, consumer discretionary, and healthcare. From period to period, about seven of the companies remain in the portfolio. When a put is exercised early, the ETF holds the stock until the next turnover date. This opens the fund up to risk of further declines in the stock price prior to the sale, but, from a quantitative perspective, the stock could also mean revert and generate a positive return for the fund. HVPW uses liquidity constraints to reduce the risks associated with liquidating the stock position on the rebalance day.

Likelihood of a Payout

Put-write strategies rely on the puts expiring OTM. Thus, they have significant downside potential in a bear market. However, the hope is that the premium can offset losses even a few puts are exercised.

The following chart graphs the probability of a single 15% OTM put option expiring ITM (with Black-Scholes assumptions) for a range of volatilities. It also shows the annual yield that the option would generate assuming it always expires worthless. The calculations assume a 10 bps risk-free rate and 2 months to expiry.

From the chart, we can see that a volatility of at least 43% is required in order to generate 9% annually in premiums. At this volatility the probability of the put expiring ITM is 17%.

A Portfolio of Puts

Of course, using a single option would not be prudent risk management. Assuming this is done independently six times in a year on options with a 17% chance of expiring ITM, the probability of never having a payout is only 33%, and that only accounts for if it will lose money, not how much.

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Thankfully, diversification can help. HVPW writes options on 20 stocks. The average of the trailing 100-day volatility of the current holdings is 44%, and the average probability that the options expire in the money is 17%. Assuming independence, there is a 98% probability that at least one of the options will expire in the money in each two month period. Indeed, since HVPW’s index went live in Feb. 2020, an average of 3-4 options have expired in-the-money in each period, with a maximum of 10 in Feb-Apr 2020 and a minimum of 0 in Jun-Aug 2020.

A few options ending slightly in the money will not break the bank, but a strong, highly correlated bear market could be detrimental. The hope is that, when a stock is declining, the implied volatility of its options is higher than the realized volatility so that HVPW can sell over-priced options. These outsized premiums are intended to mitigate payouts for the exercised puts. HVPW may write puts on the most volatile stocks, but its limited upside potential and offsetting premiums on the downside should reduce its volatility relative to the underlyings.

Our View

As with buy-write strategies, put write strategies comes with unique risks that many investors may not be fully aware of. Option payoffs are inherently nonlinear, and understanding the behavior of the options in different market environments is a key to understanding the strategy as a whole.

Aside from the general mechanics of the put-write strategy, there are many parameters that investors should know before investing: the strike price of the options, how diversified the fund is, what happens to the stock if the put is exercised early, and what types of assets the puts are being written on. All of these factors can affect the yield of the strategy and the total return.

Put-write strategies can be a great way to increase portfolio income, especially in a low and rising rate environment (stay tuned for more on this in a future post), but during a strong bear market, they can be exposed. Specifically, for HVPW, currently the only put-write ETF, as the volatility of the underlying securities increases, more puts will have a higher probability of expiring in the money (or being exercised early since they are American puts). However, during sideways and bull markets, the high volatility of the underlying securities should be beneficial since the strategy can capitalize on inflated option premiums while benefiting from fewer put payouts. As with buy-writes, ultimately, put-write strategies may be a good source of income diversification as long as one is aware of their highly path-dependent nature and how the strategy is specifically structured.

Note: Newfound does not currently utilize any put-write ETFs in its strategies but may choose to do so in the future. Newfound encourages investors to seek the advice of a financial advisor as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

If you are interested in learning more about other income generating asset classes along with a discussion on how they may perform in a rising rate environment, check out our previous posts on Bank Loans, MLPs, Convertibles, and Preferreds.

Nathan Faber

Nathan is a Portfolio Manager at Newfound Research, a quantitative asset manager offering a suite of separately managed accounts and mutual funds. At Newfound, Nathan is responsible for investment research, strategy development, and supporting the portfolio management team. Prior to joining Newfound, he was a chemical engineer at URS, a global engineering firm in the oil, natural gas, and biofuels industry where he was responsible for process simulation development, project economic analysis, and the creation of in-house software. Nathan holds a Master of Science in Computational Finance from Carnegie Mellon University and graduated summa cum laude from Case Western Reserve University with a Bachelor of Science in Chemical Engineering and a minor in Mathematics.

Put and Call Writing Explained

Learn how to sell calls and puts

Making money in any type of market can be an extremely trying proposition. You’ve got to pick the right stock, pick the right options — oh, and you’re timing also has to be right.

Considering how many components are involved with a successful trade, i.e., how many things you have to get right, why not take greater control of the variables by writing your own ticket?

Writing your own ticket involves writing put and call options. And though the goal of put writing versus call writing is different in a strategic sense, the ultimate goal of increasing your overall gains — along with your overall wealth — is one and the same.

Let’s take a look at how we can make money writing puts, and then we’ll take a look at how to do the same by writing calls.

‘Put’-tin on the Ritz: Writing Put Options

You often hear about a public company making the move to repurchase a block of its own shares on the open market. This is good for shareholders because it reduces the number of shares outstanding, while typically boosting the value of existing shares. It also increases a company’s earnings per share.

When PC moguls Bill Gates and Michael Dell wanted to do a share-buyback program for their respective empires, they took advantage of the options markets to increase the return on their investment. What they did was write (or sell) put options, and by doing so they created a win-win situation with their stock performance.

How was this accomplished?

Well, when put contracts are written, if the stock goes down in value then the shares are “put” to the writer (i.e., to buy from the owner of the shares). But if the market price spikes, as the person who has shorted the puts, you get to keep the premium you collected when you initiated the position (as “selling to open” an options position oftentimes results in an initial credit to your trading account).

Either way, it’s better for the shareholders of a company participating in a buyback because it ultimately means that the company is purchasing its stock back at lower prices, thus increasing the return on the investment for the company and, in turn, its shareholders.

Of course, writing puts isn’t just for the big guys. Individual traders can use this technique to enter into a long stock position.

Just keep in mind that when you’re selling a put option, you don’t expect the stock price to drop below the exercise (or strike) price, nor to increase significantly. That way, if the option owner assigns you to buy the stock, you will do so at the strike price of the option.

So if a stock is trading for $25 and you short a $22.50 put, if the share price dips to $22.50 and the option holder “puts” that stock to you, then they’ve saved you the legwork of making the purchase and you’re now the owner of the stock you were planning to buy anyway.

The ‘Call’ of the Wild: Writing Call Options

Often investors cite their fear of risk as the reason why they might shy away from trading options. And while the level of risk can increase with some of the more complicated options strategies out there, that’s not the case with writing covered calls.

In fact, writing covered calls is one of the most frequently used and safest options strategies, because it is one of the most conservative plays a trader can make.

On the surface, writing covered calls seems like hitting a home run. Also known as a “buy-write,” this strategy involves selling call options against stock that you already hold long.

When you sell an option, you immediately collect a premium up front, and because options settle in one business day, the credit you collect hits your trading account a day later. It’s like you get to make money just because you decide to.

Suppose you’re sitting on 1,000 shares of the hypothetical XYZ Corp. with the stock currently trading at $34. Suppose the shares are trading pretty steadily and haven’t made a significant jump in a while.

Instead of waiting around and hoping for the stock to receive its own version of a stimulus package, you can take the opportunity to sell calls at the $35 strike against your position.

Let’s say the XYZ Oct 35 Calls trade at $1.95 per share. That’s $195 per contract, and as one contract covers 100 shares, you can sell a 10-lot, or 10 contracts, for $1,950, so that’s the amount of money that you would take in by selling your calls.

Why the XYZ Oct 35 Calls? Well, for two reasons.

One, the strike price is higher than the current market value, which means that you are agreeing to sell your shares for $35 each should the buyer wish to exercise his or her right to buy the stock (i.e., call it away from you). This means that in addition to the $1,950 that you took in, you’d be selling the shares for $1 more than the level where they’re currently trading.

Two, insofar as choosing the October calls, their expiration date is far enough away that if you are expecting the stock to move up (so that the options become more valuable), you’re giving yourself enough time to be right.

But what if the stock doesn’t go up to, or through, that $35 strike by that third Friday in October?

Well, then you’d keep your premium money — as well as your stock — because the option buyer wouldn’t want to call the shares away from you at a cost that’s above the market price. His or her option would likely expire worthless.

Owning stock and selling covered calls against it is like having an apartment building and collecting rent on the available units. If you can’t find tenants or just haven’t gotten around to renovating a perfectly usable space, then you’re not making any money. And in neutral markets, not collecting “rent” with options trading means you could be passing up a lot of gains that you might never see by just holding on to the stock and playing the waiting game.

Python scikit learn pca.explained_variance_ratio_ cutoff

When choosing the number of principal components (k), we choose k to be the smallest value so that for example, 99% of variance, is retained.

However, in the Python Scikit learn, I am not 100% sure pca.explained_variance_ratio_ = 0.99 is equal to “99% of variance is retained”? Could anyone enlighten? Thanks.

  • The Python Scikit learn PCA manual is here

3 Answers 3

Yes, you are nearly right. The pca.explained_variance_ratio_ parameter returns a vector of the variance explained by each dimension. Thus pca.explained_variance_ratio_[i] gives the variance explained solely by the i+1st dimension.

You probably want to do pca.explained_variance_ratio_.cumsum() . That will return a vector x such that x[i] returns the cumulative variance explained by the first i+1 dimensions.

So in my random toy data, if I picked k=4 I would retain 93.3% of the variance.

Ratio Put Write Explained

Виды кэша на рейд контроллерах LSI и Intel

Всем привет, давно хотел написать для себя напоминалку, по поводу того какие виды кэша на рейд контроллерах LSI и Intel бывают, и какие настройки лучше всего выставлять для достижения максимальной производительности на ваших RAID контроллерах. Сразу хочу отметить, что если у вас есть запас времени, перед, тем как отдать сервер в продашен заказчику, то не поленитесь все же провести несколько тестов с разными настройками, и не забывайте, до их начала обновить все прошивки на оборудование и RAID контроллер.

Общие понятия по видам кэш

Существует три разновидности cache на RAID контроллерах:

Рассмотрим более детально, что из себя представляет каждая политика кэширования.

Read policy (Политика чтения)

Политика Read Ahead Policy: При ее включении контроллер начинает считывать последовательно сектора на диске, находящиеся за сектором с которого извлекается информация. При низкой фрагментации данная политика позволяет увеличить скорость чтения. Каждая операция чтения будет потреблять больше ресурсов жесткого диска, но если запросы на чтение последовательные это может существенно уменьшить количество запросов на чтение на жесткие диски и может существенно повысить производительность. Этот параметр будет работать только если типичный размер запроса на чтения меньше, чем ширина полосы пропускания.

Политика No Read Ahead (Normal) : При данном режиме контроллер не будет считывать последовательно данные, данный режим предпочтительнее когда будут производиться рандомные (случайные) чтения. Также этот режим рекомендуется при измерении последовательного чтения с помощью I/O meter под Windows.

Политика Adaptive Read Policy : по сути политика адаптивного чтения при которой контроллер запускает политику упреждающего чтения только после того, как две последние операции запрашивали доступ к последовательно идущим блокам данных. Если далее идут блоки рандомно разбросанные по дисковой подсистеме контроллер возвращается в нормальный режим работы. Этот режим рекомендуется использовать, если нагрузка на RAID контроллере подразумевает смешанные и последовательные операции.

Write policy (Политика записи)

Политика W rite-Through : Включая данную политику контроллер начинает посылает сигнал о завершении записи только тогда, когда информация упадет на физические носители, т.е. 100 процентов будет уже на жестких дисках. Обеспечивает более высокую безопасность. Данный режим не использует кэш для ускорения записи, и будет медленнее других, однако позволяет так же достичь хороших показателей при RAID 0 и RAID 10.

Политика Write-Back : Включая данный режим политика кэширования RAID контроллера начинает посылать сигнал о завершении записи только тогда, когда информация попадает в кэш контроллера, но еще не записана на дисковый массив. Обеспечивает более высокую прозводительность чем при политике write-through. Приложение продолжает работать, не дожидаясь, чтобы данные были физически записаны на жесткие диски. Но есть одно большое, но если во время работы RAID контроллера в таком режиме у вас пропадет электричество, то с 99 процентной вероятностью вы потеряете данные, для предотвращения этого есть BBU батарейки или модули защиты данных, так же советую проверить что у вашего сервера есть UPS (источник бесперебойного питания) и дублирующее подключение питания от блока питания.

Политика Write-Back with BBU : Данный режим это все тот же Write-Back, но разница в том, что у нас есть батарейка BBU, которая предотвращает потерю данных при выключении электропитания.

BBU или Battery Backup Unit (Модуль Резервной Батареи). BBU дает батарейную защиту питания для cache RAID контроллера. В случае сбоя питания, BBU поможет сохранить данные в кэше.

I/O Policy (Политика ввода/вывода)

Политика ввода/вывода определяет, будет ли RAID контроллер сохранять данные в кэше, который может уменьшить время доступа к ним при последующих запросах на чтение сделаными в те же самые блоки данных.

Политика direct IO : чтение происходит с дисков. Прямой режим I/O рекомендуется в большинстве случаев. Большинство файловых систем и множество приложений имеют свой собственный кэш и не требуют кэширования данных на уровне контроллера RAID.

Политика Cached IO : При ее включении чтение происходит с дисков, но прочитанные данные одновременно кладутся в кэш. Запросы тех же данных в последствии берутся из кэша. Этот режим может потребоваться, если приложение или файловая система не кэширует запросы чтения

Disk cache policy : это политика кэша диска. Если ее включить то на дисках будет храниться дополнительный кэш, это будет влиять на скорость записи в худшую сторону, но будут быстрее считывание, так же при включенном режиме есть риск потери данных.

Настройка RAID контроллера для лучшей производительности

Любой инженер по системам хранения данных, хочет чтобы его инфраструктура работала как можно быстрее и использовала весь функционал заложенный в ней. Каждый вендор RAID контроллеров, имеет некий best prictice для своей продукции, давайте сегодня рассмотрим их на примере контроллеров Intel и LSI.

Оптимальные настройки для контроллеров Intel

Ниже представлена таблица с рекомендуемыми настройками для контроллеров Intel, для достижения максимальной производительности. О таких параметрах как Stripe size, Virtual Drive initialization, Consistency Check, Patrol Read мы поговорим ниже. Как видите лучшим режимом чтения является Adaptive Read Ahead, а режимом записи Write Back.

Оптимальные настройки для контроллеров LSI

Ниже представлена таблица с рекомендуемыми настройками для контроллеров LSI, для достижения максимальной производительности. Будут рассмотрены сводные таблицы для HDD и для SSd дисков.

Оптимальные настройки для HDD

Размер stripe 256 kb, включение disk Cache Policy включен, выбран I/O Policy Direct IO, нужно дать закончить lun инициализацию

MegaRAID Settings for Maximum HDD Performance

Оптимальные настройки для SSD

Размер stripe 256 kb, включение disk Cache Policy включен, выбран I/O Policy Direct IO, нужно дать закончить lun инициализацию, режимы записи для разных видов RAID разные.

MegaRAID Settings for Maximum SSD Performance

Оптимальные настройки для HP контроллеров

Факторы влияющие на производительность

Рассмотрим что такое Stripe size, Virtual Drive initialization, Consistency Check, Patrol Read.

Virtual Drive initialization – это зануление, блоков раздела, перед тестирование скорости советую дождаться полной инициализации. По времени занимает по разному все зависит от размеров массива.

Stripe size – Размер блока данных одной ячейки раздела, по сути карта как данные распределены по жестким дискам. Размер страйпа может иметь большое влияние на
Конфигурирование RAID для оптимальной производительности и других факторов эффективности. Как правило при последовательных данных увеличить скорость RAID контроллера можно с помощью размеров stripe 512 kb или 1 mb. При случайном виде доступа лучше 16 кб, все зависит от того какое По у вас будет крутиться на данном разделе. Но в большинстве случаев лучше оставить стандартный размер, предлагаемый производителем.

Consistency Check – Проверка целостности является важной функцией, которая помогает обнаружить несоответствия в данных, хранящихся на жестких дисках в RAID массивах и выявляет возможные повреждения данных.
Проверка целостности генерирует значительное количество запросов к диску, которые могут уменьшить производительность RAID. В идеале ее вообще отключить, но этим вы жертвуете оповещением о ранних проблемах с дисками.

Patrol Read – помогает обнаруживать и исправлять плохие блоки на жестких дисках и предотвращать возможную потерю данных. Patrol Read генерирует значительное количество запросов к диску, которые могут уменьшить производительность RAID контроллера.
Вы должны включить или отключить Patrol Read в зависимости от цели вашей работы

Надеюсь у вас не осталось вопросов по выбору лучшего метода кэширования для вашего RAID контроллера, если у вас есть вопросы то задавайте их в комментариях.

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One Response to Виды кэша, настройка производительности на рейд контроллерах LSI и Intel

Доброго времени суток.
Купили raid контроллер MegaRAID S3108 + BBU, думаю на нем настроить 3 зеркала,
2 на SSD(на одном система, на втором базы SQL), 3 зеркало sata для общих папок. Возникает вопрос вообще можно ли на один контроллер цеплять SSD и SATA
диски, по какому варианту настраивать кэш(можно ли для каждого виртального диска настраивать отдельно? Не будет ли разваливаться raid на SSD?(на встроенном в плату интеловском разваливался два раза, после второго даже не собирал). SSD диски INTEL.

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