Schaeffer's Trading Floor Blog

When Will a Buy-Write Strategy Outperform?

A closer look at the CBOE S&P 500 2% OTM BuyWrite Index (BXY) relative to the SPDR S&P 500 ETF Trust (SPY)

by 9/19/2014 9:12 AM
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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.

BXY vs 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 vs SPY Since Inception

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.

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Analyst Upgrades:, Inc., Alibaba Group Holding Ltd, and Yahoo! Inc.

Analysts upwardly revised their ratings on AMZN, BABA, and YHOO

by 9/19/2014 8:53 AM
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Analysts are weighing in today on Internet marketplaces, Inc. (NASDAQ:AMZN) and Alibaba Group Holding Ltd (NYSE:BABA), and online media giant Yahoo! Inc. (NASDAQ:YHOO). Here's a quick roundup of today's bullish brokerage notes on AMZN, BABA, and YHOO.

  • After unveiling six new devices yesterday -- including the $199 Kindle Voyage e-reader -- AMZN saw its price target raised to $435 from $380 at RBC Capital Markets. The bullish brokerage note is curious, given the stock's year-to-date loss of 18.5% to trade at $325; plus, the shares were recently rejected at the $350 level. Nevertheless, optimism on the Street is easy to find. Nearly two-thirds of covering analysts have given, Inc. a "buy" or "strong buy" rating, and the equity's consensus 12-month price target of $393.26 stands at a 21% premium to current trading levels.

  • Meanwhile, AMZN rival BABA will make its highly anticipated public debut today. Cantor is adding to the buzz this morning, starting coverage on the stock with a "buy" rating and a $90 price target -- a more than 32% premium to Alibaba Group Holdings Ltd's expected initial public offering price of $68.

  • Finally, YHOO -- which owns a significant stake in BABA -- saw its price target lifted to $43 from $39 at Cantor, to $46.50 from $45 at Jefferies, and to $48 from $44 at Piper Jaffray. On the charts, Yahoo! Inc. has been a mixed bag, sporting an impressive year-over-year advance of 35.6% -- and reaching a new eight-year high of $44.01 earlier this week -- but up just 4.1% on a year-to-date basis. Taking a step back, sentiment on Wall Street is mixed toward Yahoo! Inc. While the shares have received 14 "buy" or better opinions from covering analysts, versus just six "holds" and not a single "sell" rating, their consensus 12-month price target of $39.55 sit at a discount to the current price of $42.08.

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Analyst Update: Dunkin Brands Group Inc, E I Du Pont De Nemours And Co, and Monsanto Company

Analysts adjusted their ratings on DNKN, DD, and MON

by 9/18/2014 2:42 PM
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Analysts are weighing in today on doughnut titan Dunkin Brands Group Inc (NASDAQ:DNKN), big-cap chemical company E I Du Pont De Nemours And Co (NYSE:DD), and agricultural concern Monsanto Company (NYSE:MON). Here's a quick look at today's brokerage notes on DNKN, DD, and MON.

  • Shares of DNKN are off 1.9% today, despite J. P. Morgan Securities and Barclays raising their price targets to $50 and $53, respectively. Year-to-date, Dunkin Brands Group Inc is down 4.6%, and was last seen trading at $45.84. However, bullish option traders have taken an interest in the stock lately, as DNKN's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 28.14 is only two percentage points from an annual high, meaning calls have been purchased at a faster-than-normal rate relative to puts in the past two weeks.

  • DD has gained 2.6% today, continuing yesterday's rally to hit a 14-year high of $71.42 after scoring bullish brokerage notes from three firms, including an upgrade to "overweight" from "neutral" at J.P. Morgan Securities. On the year, E I Du Pont De Nemours And Co has added nearly 10%. Elsewhere, option traders are betting on the equity to continue its strong showing, as DD's 10-day ISE/CBOE/PHLX call/put volume ratio of 6.74 sits in the 99th percentile of its annual range, meaning calls are being purchased over puts at a near annual-high rate. Moreover, the stock's Schaeffer's Volatility Index (SVI) of 8% is at an annual low, meaning short-term options are at a bargain price, from a volatility standpoint.

  • After Stifel Nicolaus raised its recommendation to "buy" from "hold," shares of MON have gained over 1% to trade at $115.03 today. Monsanto Company is off over 1% on the year, and in the last three months the stock has underperformed the broader S&P 500 Index by more than 8 percentage points. On the options front, MON's 10-day ISE/CBOE/PHLX call/put volume ratio sits in its 91st annual percentile, coming in at 3.94, meaning traders have had a healthier-than-normal appetite for calls over puts in the last two weeks.

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Stocks On the Move: VirnetX Holding Corporation, Sony Corp (ADR), and Repros Therapeutics Inc

VHC, SNE, and RPRX are moving sharply in Thursday's trading

by 9/18/2014 12:40 PM
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Equities markets are on fire this afternoon, with both the Dow and S&P 500 Index (SPX) notching record intraday peaks. Not everyone is participating in the broad-market rally, though; specifically, tech licensing firm VirnetX Holding Corporation (NYSEMKT:VHC), electronics issue Sony Corp (ADR) (NYSE:SNE), and biotechnology concern Repros Therapeutics Inc (NASDAQ:RPRX) have all made notable moves to the downside. Here's a quick roundup of how VHC, SNE, and RPRX are performing on the charts so far.

  • It's been a terrible week for VHC, which has plunged almost 69% from last Friday's close to churn near $4.79, after a federal court on Tuesday ruled in favor of Apple Inc.'s (NASDAQ:AAPL) patent-infringement appeal. Today alone, shares of VHC are off 37%, and earlier hit the $4.18 mark -- their lowest perch in more than four years. Short sellers are likely cheering the sell-off. At present, 41% of the stock's float is sold short, and would take 53 sessions to cover, at VirnetX Holding Corporation's average daily pace of trading.

  • It's another down day for SNE, which has surrendered more than 11% since Tuesday's close, due to a number of poorly received fundamental developments. Today, the shares are roughly 4.7% lower at $17.99, but seem to have found a foothold atop their 60-day moving average. Should the security continue its slide, a round of downgrades and/or price-target cuts could apply additional pressure. Currently, all three analysts covering Sony Corp (ADR) maintain a "strong sell" recommendation, while the consensus 12-month price target of $23.65 represents a 31.5% premium to present trading levels.

  • RPRX tagged a fresh 52-week low of $8.88 earlier -- but was last seen down 25% at $9.67 -- after a Food and Drug Administration (FDA) panel unanimously voted to apply severe limitations to companies producing testosterone drugs. Heading into today's session, the equity was already sitting on a steep 30% year-to-date decline, yet option traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 4.66 calls for every put over the past 10 sessions. What's more, this ratio ranks in the 80th percentile of its annual range, meaning long calls have been initiated over puts at a faster-than-usual clip. With 22.7% of Repros Therapeutics Inc's float sold short, though, a portion of this activity could be the result of shorts hedging against any unexpected upside.

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Analyst Downgrades: Peabody Energy Corporation, Dean Foods Co, and Las Vegas Sands Corp.

Analysts downwardly revised their ratings on BTU, DF, and LVS

by 9/18/2014 9:29 AM
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Analysts are weighing in today on coal miner Peabody Energy Corporation (NYSE:BTU), dairy products maker Dean Foods Co (NYSE:DF), and casino name Las Vegas Sands Corp. (NYSE:LVS). Here's a quick roundup of today's bearish brokerage notes on BTU, DF, and LVS.

  • BTU was hit with a downgrade to "sell" from "neutral" at Goldman Sachs, which also lowered the stock's price target to $13 from $15. This isn't particularly unexpected, given the shares' year-to-date loss of 27.3%. In the options pits, long puts have been strongly preferred over long calls of late, per Peabody Energy Corporation's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 2.08. In fact, this number stands higher than 97% of all other readings from the past year, suggesting options traders have rarely been as put-skewed toward BTU as they are now. At last check, the shares were resting at $14.19, and are set to hit a near-decade low out of the gate.

  • DF received a price-target cut to $20 from $21 at BMO; however, the brokerage firm maintained an "outperform" evaluation on the stock. Technically speaking, the shares have slid 11.6% in 2014 to trade at $15.19, and have underperformed the broader S&P 500 Index (SPX) by 16 percentage points during the previous 60 sessions. Short sellers have taken notice, too, as 14.5% of Dean Foods Co's float is sold short. At the security's average daily trading levels, it would take eight sessions to buy back all of these bearish bets.

  • For the second day in a row, LVS is seeing bearish brokerage attention. Specifically, J.P. Morgan Securities lowered the stock's price target to $69 from $83 this morning, after Sterne Agee cut its own price target to $80 from $84 on Wednesday. The Street's dimming view of Las Vegas Sands Corp. may spring from Wells Fargo's earlier comments that Macau gaming revenue for September will decline by a steeper-than-expected margin. Additional bearish notes may be on the way, too, as 11 out of 14 covering brokerage firms have handed out "strong buy" recommendations on LVS, versus three "holds" and not a single "sell" rating. On the charts, the equity is down nearly 21% this year to rest at $62.38.

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