UBS backtesting S&P 500 protective put option strategies since 2002 revealed that long-term rolling over of puts incurs significant holding costs, ultimately resulting in negative returns in most years. While puts can indeed appreciate rapidly during market crashes, continued holding often leads to the gradual erosion of initial hedging gains as the market rebounds, volatility declines, and option time value decays.
This phenomenon has been particularly evident in recent rounds of sharp market fluctuations. UBS points out that recent volatility shocks have tended to be short-lived, quickly followed by volatility normalization and a rebound in risk assets. Therefore, the effectiveness of protection strategies increasingly depends on the ability to realize gains from volatility spikes in a timely manner. While mechanically holding puts long-term can provide continuous downside protection, carry costs will continuously drag down portfolio performance.
