Abstract
A “buy-write” can be described as an investment strategy in which an investor buys stock(s) and writes covered call options for increased cash flows. In this decade investors have shown more interest in buy-writes for a number of reasons, including the fact that long-term risk and return characteristics of the buy-write strategy are easier to analyze because there now are 1) more buy-write studies by academics and consulting firms, and 2) benchmark indexes for buy-write performance such as the CBOE S&P 500 BuyWrite Index (BXM). Sometimes sluggish performance of traditional assets such as stocks and bonds has led to more investors seeking alternative investments that have delivered good cash flows and strong risk-adjusted returns, even if the alternatives tend to underperform stocks in bull markets. Over a period of almost 22 years dating back to June 30, 1986, the BXM Index had returns close to those of the S&P 500 Index, but with only 69% of the volatility of the S&P 500 Index. Key sources of return for the BXM Index include the facts that the BXM Index took in options premiums at a rate of more than 1.6% per month, and the index options often were richly priced, with implied volatility usually being higher than the realized volatility for the index options. The recent introduction of two ETFs-the PowerShares S&P BuyWrite Portfolio (PBP) and PowerShares “NASDAQ-100” BuyWrite Portfolio (PQBW)-give investors more flexibility as they explore possibilities for implementing the buy-write strategy for their investment portfolios.
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