This Covered Call Index Tends To Outperform The S&P 500 When Returns Are Modest Or Down
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View from the Observation Deck  
  1. From 2003-2021, 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 19 calendar years. We chose 2003 because it was the first year of a new bull market. 
  2. For comparative purposes, from 1926-2021 (96 years), the S&P 500 Index posted an average annual total return of 10.46%, 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, 2019 and 2020 (see table). The strategy, however, performed well in 2021. 
  6. A Bloomberg survey of 24 equity strategists found that their average 2022 year-end price target for the S&P 500 Index was 4,868 as of 4/18/22, according to its own release. The highest and lowest estimates were 5,330 and 4,400, respectively. 
  7. As of 5/3/22, the S&P 500 Index stood at 4,175.48, which was 12.95% below its all-time high of 4,796.56 set on 1/3/22 and 16.59% below the 4,868 average 2022 price target referenced in point 6, according to Bloomberg.
  8. As of 4/29/22, Bloomberg's consensus estimated year-over-year earnings growth rates for the S&P 500 Index for 2022, 2023 and 2024 were 10.32%, 9.41% and 9.07%, respectively. 
  9. Morningstar added Options Trading to its Alternative Funds category in early 2021. Investors funneled a net $4.71 billion into Options Trading mutual funds and exchange-traded funds (ETFs) in Q1'22, according to Morningstar. Net inflows totaled $15.71 billion for the 12-month period ended 3/31/22.
  10. The CBOE S&P 500BuyWrite Index has significantly outperformed the S&P 500 Index so far in 2022 (see table). It has not outperformed the S&P 500 Index for a calendar year since 2015. Stay tuned! 
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 companies 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, May 5, 2022 @ 10:50 AM

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.