Naked Put Selling Burns Hawaii Pension

Get ready for the other shoe to drop from last week’s short volatility fueled crash. Short vol funds could face redemptions when investors see performance from last week. Pensions don’t face redemptions, they fire investment officers. The first signs of trouble started in Hawaii of all places.

Hawaii Employees Retirement System (ERS) chief investment officer Vijoy Chattergy was fired days after a story in the Wall Street Journal on losses from put options selling.

Put selling profits when the market stays in one place or goes up. But if the market falls, losses are only limited to the price of the underlying stock or ETF. Selling puts has been very profitable since Hawaii ERS started the practice in 2016. The problem is that put selling is highly correlated with Hawaii’s equity exposure. As the stock market goes down so does the put selling strategy.

ORATS simulated a popular put selling strategy, the CBOE put writing index, in a backtester and ran the test through last Friday, 2/9/18. The SPY put selling strategy is down nearly 4% in February and the only losing month in the test. The SPY is down 7.3% for in February. See the full strategy here.

According to the Honolulu Star, Chattergy was fired because trustees had problems with his “management style”. Before Chattergy was fired, he said Hawaii will continue to sell these put contracts, convinced the income will offset market turbulence. “We’re continuing to trade the strategy.” With the prospect of more losses exacerbating losses in its underlying fund, Hawaii decided enough was enough.