Stocks quoted in this article:
As we noted yesterday, a general buy-write strategy has outperformed the market over the very long haul -- 25 years, to be exact. And, perhaps most impressively, it does it while reducing the volatility of the portfolio.
But alas, your mileage may vary. It very much depends on timing. Here's a comparison of CBOE S&P 500 2% OTM BuyWrite Index (BXY) to SPDR S&P 500 ETF Trust (SPY) in 2014.
It makes intuitive sense. While the market meandered early this year, a premium-generating strategy added value. But, as the rally picked up some steam in the late spring and early summer, you were better off just riding it out straight long. Remember, with these buy-write indices, there's only rolling at expiration. So, if at some point the market lifts such that the short calls became de facto stock shorts, you essentially have a flat position and may miss chunks of a move.
How about a little longer haul? Here's BXY vs. SPY since the inception of BXY.
BXY massively outperformed in 2008, and actually peaked (relatively) at the end of 2009. The 2008 part certainly makes sense. With everything battered, something like BXY clearly did "less bad." Those premiums provided a de facto dividend on an otherwise sinking asset. As to 2009, it's less clear, though I suspect it's because implied volatility itself was so high that the premiums were still able to offset the absolute gains of the market itself.
But, since the end of 2009, BXY has underperformed, save for some blips here and there. And that does makes sense.
The last four and a half years are marked by both rising stocks and declining volatility. CBOE S&P 500 Buy Write Index (BXM), BXY, and CBOE S&P 500 PutWrite Index (PUT) all sell and roll near-term options, so it's safe to presume they have taken in lower and lower premiums over time. Those premiums are actually high enough vs. realized volatility in the market itself, but that's more relevant to a day-to-day look. Over the course of time, the directional move has been up. There's just no way a dedicated buy-write index can keep pace in that sort of backdrop.
The Chicago Board Options Exchange (CBOE) always back-calculates performance of any new listed index. It used 25 years in the tables from yesterday, and frankly if it went back even further, the outperformance would have looked even better. That's because the 1987 data probably would look like the 2008 does above.
Clearly, buy-writing is not always preferable. If you're out-and-out bullish, you're better off just owning stocks or an index fund or whatever. But, if you expect the market to tread water a bit, tracking these premium-selling funds can work out well.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.