pcyhuang,
I disagree that the chart portends a negative environment for an index buy-write strategy. Consider the differential performance of BXM to the SPX:
stockcharts.com
Since the start of 2009, BXM has outperformed the SPX by nearly 6%. In other words, nearly all of the downside so far in 2009 could have been hedged against by using a buy/write strategy.
A longer-term chart of the BXM:SPX ratio tells an interesting story:
stockcharts.com
Note that the BXM underperformed in 2007 up until October 31 (when the SPX topped), then greatly outperformed right up until the market bottom on November 21 (when it crashed against the SPX because of the SPX rally) and has outperformed since mid-December.
The story it tells, IMO, is that a buy-write strategy will underperform in strongly trending markets (up or down), but will outperform in sideways, choppy markets.
BXM simulates a write of an at-the-money call. I think performance can be improved even over the BXM by altering the strategy a bit during what appears to be a trending market, writing slightly OTM calls in an uptrend and slightly ITM calls in a downtrend. Also, in times of greater volatility (like now), it might be advantageous to look out beyond the front month for writing the calls, and maybe use some of the premium to buy some front-month OTM puts. |
