Implementation of Cash-Secured Puts as a Systematic Income Strategy

Precious metals such as gold performed strongly last year. Central banks continue to increase their allocations, positioning gold as a primary reserve asset. Its liquidity remains far higher than other precious metals, which makes it a natural candidate for systematic trading strategies.

At Cordoba, we have introduced a systematic income strategy built on cash secured puts to generate consistent premium income while controlling downside risk through volatility management. We focus on GLD ETF options, which are the most liquid gold contracts available.

Full Code Replication Notebook on Cordoba Github Page:

https://github.com/CordobaCapital/GLD-Income-Strategy-with-Cash-secured-Put

GLD in Portfolio Construction and Risk Hedging

Gold’s role extends beyond income generation. It has historically shown negative correlation with the broader market, making it valuable during periods of monetary uncertainty. This relationship became evident when the Federal Reserve delayed its rate cutting cycle earlier this year.

While equities and other traditional assets declined, gold prices advanced. Gold’s volatility profile also differs from equity markets, creating additional diversification benefits and making it an attractive component for systematic portfolio construction.

Over the last decade, GLD’s rolling correlation with the S&P 500 is quite neutral and narrowed. It ranged between -0.3 and 0.3.

Methodology

The cash secured put strategy combines two elements: holding cash or liquid Treasury bills and writing a put option based on the current spot price of gold. The payoff profile is straightforward. The maximum gain is limited to the option premium received, while the downside occurs if the counterparty exercises the put when the price of gold falls below the strike price. By design, the strategy has capped upside and capped downside, which serves to smooth the return profile compared to outright long or short exposure.

An important consideration is the behavior of implied volatility. As shown by the implied volatility surface, a distinct volatility smile is visible across expirations within 15 days (data as of August 21). Both out-of-the-money calls and puts exhibit elevated implied volatility, reflecting heightened uncertainty in the market.

In this environment, a cash secured put offers a systematic way to generate income while maintaining modest exposure to the upside. Losses are limited relative to outright long positions, while the premium income helps offset drawdowns. More importantly, over the long run, gold remains structurally bullish as a hedging asset against monetary instability and reserve diversification by central banks. This makes the put write approach attractive, as it balances income generation with the ability to participate in gold’s upward drift.

Strategy Implementation

The strategy is implemented using GLD (SPDR Gold Trust ETF) options. We employ a systematic short put (put-write) structure with a target of selling out-of-the-money puts at approximately 25 delta, maintaining an average of 30 days to expiration (DTE). Positions are initiated daily, with up to ten contracts open at any given time to ensure diversification across entry dates. Each position is held for a maximum of 30 days, with early exit simulations applied when profit targets or risk thresholds are met. This systematic approach ensures consistent premium capture while controlling downside exposure.

Positions are initiated daily, with a cap of ten open positions at any time, creating a diversified “ladder” of maturities rather than a single concentrated trade. Each put is fully collateralized with cash or Treasury equivalents, ensuring that downside risk is covered at all times. Positions are closed early if profit targets are reached, risk conditions change, or at expiration through cash settlement.

Idle cash earns the risk-free rate, ensuring capital efficiency, while mark-to-market adjustments reflect real-time valuations. Performance is benchmarked against simply holding GLD. Our backtest highlights the strategy’s ability to smooth out returns: premium income provides consistent yield, while disciplined position management controls drawdowns.

Systematic Entry & Risk Control

if len(positions) < max_concurrent:
    K = strike_for_target_put_delta(S, T_years, r, q, sigma, target_put_delta)
    needed = K * 100.0
    available_cash = cash - reserved_collateral
    if available_cash >= needed + commission_per_contract:
        entry_price = bs_put_price(S, K, T_years, r, q, sigma)
        positions.append(Position(K, expiry_trading, -1, entry_price, entry_price))
        cash += entry_price * 100.0
        reserved_collateral += needed

if len(positions) < max_concurrent:
    K = strike_for_target_put_delta(S, T_years, r, q, sigma, target_put_delta)
    needed = K * 100.0
    available_cash = cash - reserved_collateral
    if available_cash >= needed + commission_per_contract:
        entry_price = bs_put_price(S, K, T_years, r, q, sigma)
        positions.append(Position(K, expiry_trading, -1, entry_price, entry_price))
        cash += entry_price * 100.0
        reserved_collateral += needed

Each trading day, the model checks whether it can add more puts without breaching the maximum number of concurrent positions. Strikes are chosen by targeting a specific put delta, which aligns the risk profile with a consistent probabilistic view of moneyness.

Position Management & Exit Logic

for pos in positions:
    dte = max(0, (pos.expiry - dt).days)
    T_rem = max(1e-9, dte / 365.0)
    P_today = bs_put_price(S, pos.strike, T_rem, r, q, sigma)

    # Early profit taking
    if P_today <= (1 - TAKE_PROFIT) * pos.entry_price:
        cash -= (P_today * 100.0) + commission_per_contract
        continue  

    # Expiry settlement
    if dte == 0:
        intrinsic = max(pos.strike - S, 0.0)
        cash -= intrinsic * 100.0
        continue  

    new_positions.append(Position(pos.strike, pos.expiry, pos.qty, pos.entry_price, P_today))

for pos in positions:
    dte = max(0, (pos.expiry - dt).days)
    T_rem = max(1e-9, dte / 365.0)
    P_today = bs_put_price(S, pos.strike, T_rem, r, q, sigma)

    # Early profit taking
    if P_today <= (1 - TAKE_PROFIT) * pos.entry_price:
        cash -= (P_today * 100.0) + commission_per_contract
        continue  

    # Expiry settlement
    if dte == 0:
        intrinsic = max(pos.strike - S, 0.0)
        cash -= intrinsic * 100.0
        continue  

    new_positions.append(Position(pos.strike, pos.expiry, pos.qty, pos.entry_price, P_today))

Each option is marked to market using the Black-Scholes model, and the strategy enforces strict exit rules: profitable positions are closed early to lock in gains, while expired contracts are settled automatically against the intrinsic value. This ensures that cash balances are updated correctly and no position lingers beyond its expiration.

Performance Analysis

Throughout the past 10 years, there is a consistency of positive returns with most area green and yellow on the return heat map.

The cash-secured put strategy (blue line) delivers a lower absolute cumulative return compared with a simple buy-and-hold allocation in GLD (orange line). However, this comparison can be misleading if risk is not accounted for. When the buy-and-hold strategy is volatility-adjusted to match the risk profile of the put-writing strategy (green line), its cumulative return falls below that of the cash-secured put.

This highlights the key advantage of the strategy: superior risk-adjusted performance. While put-writing naturally caps upside compared to outright ownership, it compensates by smoothing returns and reducing drawdowns. The result is a more stable equity curve that, once normalized for risk, outperforms buy-and-hold. This makes cash-secured puts an attractive choice for systematic income generation and downside risk control, especially in assets like gold where volatility dynamics provide consistent premium opportunities.

The strategy delivers a compound annual growth rate (CAGR) of 6.2%, paired with a Sharpe ratio of 0.73 after accounting for the risk-free rate. This indicates that while returns are modest, they are achieved with a relatively efficient use of risk. Importantly, the maximum drawdown of –10% highlights that the downside is well-contained, making the cash-secured put strategy a stable income approach compared to outright equity exposure.