Sizing the Risk: Kelly, VIX, and Hybrid Approaches in Put-Writing on Index Options
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arXiv
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| Format: | Preprint |
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2025
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| _version_ | 1866916912238166016 |
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| author | Wysocki, Maciej |
| author_facet | Wysocki, Maciej |
| contents | This paper examines systematic put-writing strategies applied to S&P 500 Index options, with a focus on position sizing as a key determinant of long-term performance. Despite the well-documented volatility risk premium, where implied volatility exceeds realized volatility, the practical implementation of short-dated volatility-selling strategies remains underdeveloped in the literature. This study evaluates three position sizing approaches: the Kelly criterion, VIX-based volatility regime scaling, and a novel hybrid method combining both. Using SPXW options with expirations from 0 to 5 days, the analysis explores a broad design space, including moneyness levels, volatility estimators, and memory horizons. Results show that ultra-short-dated, far out-of-the-money options deliver superior risk-adjusted returns. The hybrid sizing method consistently balances return generation with robust drawdown control, particularly under low-volatility conditions such as those seen in 2024. The study offers new insights into volatility harvesting, introducing a dynamic sizing framework that adapts to shifting market regimes. It also contributes practical guidance for constructing short-dated option strategies that are robust across market environments. These findings have direct applications for institutional investors seeking to enhance portfolio efficiency through systematic exposure to volatility premia. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2508_16598 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Sizing the Risk: Kelly, VIX, and Hybrid Approaches in Put-Writing on Index Options Wysocki, Maciej Portfolio Management Computational Finance Pricing of Securities Trading and Market Microstructure This paper examines systematic put-writing strategies applied to S&P 500 Index options, with a focus on position sizing as a key determinant of long-term performance. Despite the well-documented volatility risk premium, where implied volatility exceeds realized volatility, the practical implementation of short-dated volatility-selling strategies remains underdeveloped in the literature. This study evaluates three position sizing approaches: the Kelly criterion, VIX-based volatility regime scaling, and a novel hybrid method combining both. Using SPXW options with expirations from 0 to 5 days, the analysis explores a broad design space, including moneyness levels, volatility estimators, and memory horizons. Results show that ultra-short-dated, far out-of-the-money options deliver superior risk-adjusted returns. The hybrid sizing method consistently balances return generation with robust drawdown control, particularly under low-volatility conditions such as those seen in 2024. The study offers new insights into volatility harvesting, introducing a dynamic sizing framework that adapts to shifting market regimes. It also contributes practical guidance for constructing short-dated option strategies that are robust across market environments. These findings have direct applications for institutional investors seeking to enhance portfolio efficiency through systematic exposure to volatility premia. |
| title | Sizing the Risk: Kelly, VIX, and Hybrid Approaches in Put-Writing on Index Options |
| topic | Portfolio Management Computational Finance Pricing of Securities Trading and Market Microstructure |
| url | https://arxiv.org/abs/2508.16598 |