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

TL;DR

This paper investigates systematic put-writing strategies on S&P 500 options, highlighting the importance of position sizing methods like Kelly, VIX, and a hybrid approach for optimizing long-term risk-adjusted returns.

Contribution

It introduces a hybrid position sizing method combining Kelly and VIX-based approaches, providing a dynamic framework for short-dated option strategies.

Findings

Ultra-short-dated, out-of-the-money options yield superior risk-adjusted returns.

The hybrid sizing method balances returns and drawdown control effectively.

Strategies perform robustly across different market regimes, especially in low-volatility periods.

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.