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Ibbotson Case Study on BXM
Ibbotson Associates, now part of MorningStar, conducted a case study of the investment value of the CBOE S&P 500 BuyWrite (BXM) Index from a total portfolio perspective. The study assessed risk-adjusted performance, taking into account the skew and kurtosis of the covered call strategy.
Summary Of Results
The results showed that the BXM Index has had relatively good risk-adjusted returns during the study period (1988 to 2004). The compound annual return of the BXM Index over the almost 16-year history of this study is 12.39 percent, compared to 12.20 percent for the S&P 500, and the BXM had about two-thirds the volatility of the S&P 500.
Better returns:
Lower risk-adjusted returns (Stutzer Index values):
Comparisons of Returns and Standard Deviations
During the 190-month time period studied, the BXM Index had:
- Higher returns and quite a bit lower volatility than the S&P 500, Russell 2000 and MSCI EAFE stock indexes.
- Higher returns and higher volatility than bonds and Treasury bills.
- High risk-adjusted returns as measured by the Stutzer Index, even when taking into account the negative skew. A monthly buy-write strategy takes in premium income and has a truncated monthly upside as the option is exercised above the strike price. Therefore, the buy-write strategy may be expected to outperform stocks in bear markets and underperform stocks in bull markets.
For even more data, download the Ibbotson Associates case study on BXM Buy-Write Options Strategy.
Mike Scanlin is the founder of Born To Sell and has been writing covered calls for a long time.