Log in to Connect, link to Chapter 20, and find there a spreadsheet containing monthly values of the S&P 500 Index. Suppose that in each month you had written an out-of-the-money put option on one unit of the index with an exercise price 5% lower than the current value of the index.
a. What would have been the average value of your gross monthly payouts on the puts over the 10-year period October 1977-September 1987? The standard deviation?
b. Now extend your sample by one month to include October 1987, and recalculate the average payout and standard deviation of the put-writing strategy.
c. What do you conclude about tail risk in naked put writing?