Connors Put-Premium Income Strategy

The objective of this strategy is to systematically capture options premiums that will generate a modest flow of income while having a defined amount of downside risk. A strategy like this is typically used when the investor expects a moderate rise in the price of the underlying asset, whether it is an individual stock, index, or ETF. This strategy is constructed by purchasing one put option while simultaneously selling another put option with a higher strike price. The goal of this strategy is realized when the price of the underlying stays above the higher strike price, which causes the short option to expire worthless, resulting in the trader’s keeping the premium. The monthly downside is measured by the “window of risk” or spread between the strike prices of the two put options minus the premium that was captured.

Attributes

  • Capture of option writing benefits through the sale of S&P 500® put contracts during final month of option life, the period of fastest premium decay
  • Controlled risk exposure using a subsequent put contract purchase. The typical one-month risk is limited to the spread window minus net premium received (generally 4-5% limit)
  • Strategy delivered as an overlay to strategic bond and or equity investments. Ideal as part of a liability-driven investment solution
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Strategy Process

Sale of a put near current market level and purchase of protective put below the market level.

STEP 1

Write a near‐term S&P 500® Index (SPX℠) put option against the S&P 500® stock index portfolio with an exercise price just below the current level of the index.

STEP 2

Simultaneously purchase a S&P 500® Index (SPX℠) put option with an exercise price 5 ‐ 7% below the current level of the index.

STEP 3

Add the net cash received from sale and purchase of the put options and add to the total value of portfolio. Repeat monthly.