With the introduction of new ETFs that employ the covered call options strategy, it is instructive to take a look at the past performance of such strategies. The CBOE S&P 500 BuyWrite Index (BXM) tracks the performance of a hypothetical buy-write strategy on the S&P 500 Index. The Index is computed by writing one month, slightly out-of-the-money call options on a S&P 500 Index portfolio and adding the change in value of the call premium to the change in value of the S&P 500 Index plus dividends.
In a 2004 paper, Ibbotson Associates analyzed the returns and standard deviation of BXM over a 16 year period between 1988 and 2004. During that period, the BXM index returned 12.39%, slightly higher than the 12.20% return of the S&P 500. However, BXM achieved returns comparable to the S&P 500 with a lot less volatility: standard deviation was just 10.99% for BXM compared to 16.5% for the S&P 500. As one would expect, the report found that BXM outperformed a long-only S&P 500 in bear markets but trailed the index in bull markets. The report also suggests some reasons for the superior risk-adjusted performance of BXM and suggests that such outperformance should continue in the future.
Another study by Callan Associates that analyzed BXM’s performance from 1988 to 2006 reached similar conclusions. It found that BXM returned 11.77% annually with a 9.29% standard deviation compared to 11.67% from the S&P 500 with a standard deviation of 13.89%. Note that though both these studies employed the lower bid price for the call options, investable products based on BXM might have much higher transaction costs and taxes than products tracking plain vanilla indexes.
