Sizing the Risk: Kelly, VIX, and Hybrid Approaches in Put-Writing on Index Options

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.

Publication Details

Journal
ArXiv.org
Published
2025-08-09
Primary Topic
Geochemistry and Geologic Mapping
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article
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article

Sizing the Risk: Kelly, VIX, and Hybrid Approaches in Put-Writing on Index Options

ArXiv.org
Geochemistry and Geologic Mapping
article

Sizing the Risk: Kelly, VIX, and Hybrid Approaches in Put-Writing on Index Options

article en

Abstract

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.

ArXiv.org
Openalex Percentile: Top 64%
Geochemistry and Geologic Mapping
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Sizing the Risk: Kelly, VIX, and Hybrid Approaches in Put-Writing on Index Options · ArXiv.org (2025) | TGRS Research Map | TGRS