returns on various options strategies

[gary@xxxxxxxxxxxx (Gary Funck)]

The only study that I've seen on the relative returns of convered
calls and other options strategies is in "The Options Strategy Spectrum"
by James Yates (copyright 1987).  The study is outdated, and covers
the period 1973 to 1986.  In that time period, the listed options
market was either non-existent, or very young (ie, illiquid,
inefficient), so I'm not sure how the results would compare to
today.  It was also a time period of relatively high returns on
t-bills, which almost equaled the return on the S&P.

Yates' conclusions were that a covered call strategy pretty much
mimicked the S&P (he looked at selling calls on 99 high cap. stocks),
but with a much lower standard deviation of returns.  The covered call
portfolio had a beta of 0.45, while the beta of the S&P was considered
to be 1.  The 99 stock portfolio itself had a slightly higher
beta than the S&P: 1.15.  The correlation of the covered call
portfolio to the S&P was 0.88, which shows it tracked closely to the
S&P.  Obviously in strong up periods covered calls underperformed, but
in flat to down periods they outperformed.

Reading numbers off various tables:

                            Beta     Correlation   Annual Return
S&P 500                     1.00     1.00          11.3%
long stock                  1.15     0.98          10.3%
Covered Calls               0.45     0.88          11.5%
bug stock, buy puts         0.68     0.90           8.2%
buy stock, sell straddles   0.88     0.93          13.0%
buy tbills                  0.00     0.00           9.1%
buy tbills, sell straddles -0.22    -0.41          10.8%

On a risk-adjusted basis, the covered call strategy looks pretty good.
I know of some investors who advocate a strategy that buys stock on margin,
and sells covered calls against the stock.  This leveraged strategy,
if the numbers above can be believed would have about the same
market risk as a market indexed portfolio, with perhaps twice the
return.  That theory does depend strongly upon the assumption
that the market has an upward bias.  Also, the margined return won't
be twice that of the S&P, because margin rates are maybe 3% above
the tbill rate.

-- 
| Gary Funck,  Intrepid Technology, gary@xxxxxxxxxxxx, (650) 964-8135