study: selling puts outperforms covered calls.

Discussion in 'Options' started by Free Thinker, Feb 28, 2011.


    Although covered call writing is relatively common by income investors looking to boost returns, there are questions as to whether it actually improves long-term portfolio results. The premiums are tempting: the question is, do they compensate for the lost profits on share appreciation? Is the moderate amount of downside protection afforded by the premium received worthwhile?

    This study is intended to provide factual background for an opinion on the desirability of writing covered calls on a selection of dividend paying stocks, as a method of achieving income above and beyond the dividends received.

    PUT performance is impressive - 11.11% annualized. These are cash secured puts, with the cash invested in short term Treasuries. This evidence provides considerable support for income investors who elect this or similar strategies. The support for selling covered calls is less convincing, although BXY at 10.72% outperformed SPTR by 1.3%.
  2. I didn't read the article - but any pricing discrepancy between the funds/notes is probably a result of timing, methodology, and market friction differences. Functionally they should be equivalent. My 2c.
  3. Maverick74


    I didn't read the article either but covered calls are the same as short puts and covered puts are the same as short calls. Option 101 here.
  4. Except you get paid a higher premium for selling puts than you do selling calls. Frequently the skew is significant.

    In addition your risk exposure to long stock positions is higher when selling calls. When selling puts you're only long the stocks that were put to you, hopefully for a good premium.

    I read the article BTW. :D
  5. Maverick74


    I was referring to same strike. Yes, selling OTM puts yields a higher return then selling OTM calls. Risk is more too. Nothing to see here.
  6. On the same strike, assuming P/C parity holds - IV should be equivalent. This was my contention that any differences could be a result of methodology differences between the funds (i.e. they are using different strikes, expirations, purchasing methods, etc.).
  7. Risk is less. The riskiest position is long stock with no protection.
  8. Crispy


    It’s not a very enlightening piece as equity markets have gone up much more often than down on the timeframe of the study.

    Master of the obvious type stuff imo.

    People don’t pay for "seeking alpha" do they?
  9. I read (a segment of) the article. The difference in performance is defined by the risk-reversal premium (PUT > BXY) and the additional commissions in BXM and BXY, as well as structural issues pertaining to each fund. PUT fund carries far lower allocation -- t-bill proceeds can cover any losses from short puts, although I cannot see how that doesn't violate some physical laws.

    BXM = first strike otm
    BXY = 2% otm
    PUT = atm

    The BXM and PUT funds should be close at equal allocations, but there would be a 100-300 bps skew in PUT > BXY.

    It's really an apples and oranges comparison. Flawed article.
  10. stoic


    So the selling of puts in the study out performs the writing coverd calls. Well it had better!!

    The question is NOT, what out performs what.

    A successful trader of futures had better out perform the successful trader of equities. The day trader in stocks should out perform the investor in mutual funds. Buy and hold in stocks should do better then buy and hold Bonds. The stock trader that uses margin had better out perform the trader that does not. In short the Risk had better be justified by the return. If your trading stocks and using options in what ever strategy, your over-all annualized return must be better then the Market(Index) as a whole. Otherwise you'd be better off just buying a No-load Index Mutual Fund.

    Just because this out performs that, doesn't make it right.

    can you say ....."What's your risk tolerance?"
    #10     Feb 28, 2011