This is probably a simple/dumb question, but I am not getting it.
As per GMO's recent Insight:
Second, as can be inferred from Exhibit 1, put writing strategies have a low beta to the equity market` and they are able to collect elevated premiums during market sell offs due to enhanced demand for insurance in these periods.
`This is mechanical: At-the-money put writing strategies have a delta of approximately 0.5, so a low beta to the market is guaranteed.
From that Exhibit, I can see pretty high correlation and close to 1 beta. How can a low beta to the market be guaranteed? how are the authors measuring the beta?
Alex, as per your suggestions I tried to replicate the graphs and calculations. I took the monthly index values, generated log scaled returns and here are the equity curve and related statistics (skipped subtracting US 3M T-bills from both return series):
In log scale:
So, I think GMO's ATM 1M Put Writing strategy has a different profile. And as you can eyeball from the graphs, the original (GMO's) strategy has a beta close to 1. That was my initial concern.
Any further thoughts?