Consequently, the buy-write strategy produces some attractive yields. For example, PBP has a 3.39% 12-month yield, HSPX has a 3.3% 12-month yield and QYLD has a 9.74% 12-month yield.
Ibbotson Associates has also found that the BXM has outperformed the S&P 500 during last period of rising rates, and the BMX performed at a much lower volatility. [Options-Based ETFs Generate Better Risk-Adjusted Returns]
In a flat market condition, the trader would use the buy-write strategy to generate a premium on the option. If shares fall, the option expires worthless and one still keeps the premiums on the options. However, the strategy can cap the upside of a potential rally – the trader keeps the premium generated but any gains beyond the strike price will not be realized. Consequently, in an easy-money fueled stock market rally, the buy-write strategy has underperformed the S&P 500.
“Through a market cycle, Buy-Write essentially replaces the long term positive returns of the equity market by collecting the premium imbedded in options pricing,” Colas added. “Remember – by writing a call at-the-money you are essentially foregoing any capital gain from the equity itself.”
For more information on the covered call strategy, visit our buywrite category.
Max Chen contributed to this article.