This Covered Call Index Tends To Beat The Broader Market In Low Return And Negative Return Climates
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View from the Observation Deck  

  1. From 2001-2016, the CBOE S&P 500 BuyWrite Index (an index designed to measure a covered call strategy) outperformed the S&P 500 Index in six of the 16 calendar years. It has lagged year-to-date thru 11/24/17 (see table).
  2. While covered call options can generate an attractive level of current income, they also can cap the potential for capital appreciation.
  3. The use of a covered call portfolio tends to be most beneficial to investors when the stock market posts down years (2001, 2002 & 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.
  4. Covered call writing tends to be less beneficial when stock market returns are well above their normal range, such as in 2012, 2013 and 2014 (see table). While the BuyWrite Index has performed well so far in 2017, its total return significantly lags that of the S&P 500 Index. 
  5. As of 11/24/17, the S&P 500 Index stood at its all-time high of 2,602.42. We believe that corporate earnings growth determines the direction of stock prices over time, though we concede that corporate and individual tax reform could potentially provide a boost to the stock market should Congress pass legislation. The Republicans are working to get legislation passed by the end of 2017. 
  6. Bloomberg's 2018 and 2019 consensus earnings growth rate estimates for the S&P 500 Index was 10.04% for both years as of 11/27/17. That target is just above the 0% to 10% range.
  7. From 1926-2016, the S&P 500 posted an average annual total return of 10.04%, according to Ibbotson & Associates/Morningstar.

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 is a capitalization-weighted index comprised 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 Tuesday, November 28, 2017 @ 1:09 PM

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.