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  This Covered Call Index Tends To Outperform The S&P 500 When Stock Returns Are Modest Or Negative
Posted Under: Conceptual Investing
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View from the Observation Deck  
  1. From 2003-2019, the CBOE S&P 500 BuyWrite Index (an index designed to measure a covered call strategy) outperformed the S&P 500 Index in just four of the 17 calendar years. We chose 2003 because it was the first year of a new bull market. 
  2. From 1926-2019 (94 years), the S&P 500 Index posted an average annual total return of 10.20%, according to Morningstar/Ibbotson Associates.
  3. While covered call options can generate an attractive level of current income, they can also cap the potential for capital appreciation.
  4. The use of a covered call portfolio tends to be most beneficial to investors when the stock market posts down years (2008) and when returns range from 0% to 10% (2007, 2011 and 2015), though the BuyWrite Index did not outperform the S&P 500 Index in 2005 or in 2018.
  5. Covered call writing tends to be less beneficial when stock market returns are above 10%, such as in 2010, 2012, 2013, 2014, 2016, 2017 and 2019 (see table). 
  6. As of 6/9/20, the S&P 500 Index stood 5.29% below its all-time high of 3,386.15 set on 2/19/20, according to Bloomberg. 
  7. Year-to-date through 6/9/20, the CBOE S&P 500 BuyWrite Index lagged the return on the S&P 500 Index by 14.74 percentage points (see table). If you do this comparison using 12/31/19 through 2/19/20 (all-time high for the S&P 500 Index), the S&P 500 Index was only outperforming the CBOE S&P 500 BuyWrite Index by 2.83 percentage points. What changed? The coronavirus (COVID-19) pandemic. 
  8. The pandemic hit hard and moved fast. It took a record low 16 trading days for the S&P 500 Index to plunge into bear market territory (2/19/20-3/12/20). A bear market is defined as a price decline of at least 20% from the most recent peak.
  9. As we now know, the rebound in the stock market has also been brisk. Perhaps too brisk for investors to consider a covered call strategy that would cap their potential upside. This may explain why the CBOE S&P 500 BuyWrite Index is lagging the S&P 500 Index by 14.74 percentage points year-to-date, in our opinion. 
This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. The CBOE S&P 500 BuyWrite Index (BXM) is designed to track a hypothetical buy-write strategy on the S&P 500. It is a passive total return index based on (1) buying an S&P 500 stock index portfolio, and (2) "writing" (or selling) the near-term S&P 500 Index (SPXSM) "covered" call option. 

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Posted on Thursday, June 11, 2020 @ 2:08 PM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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