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Given the volatility in todays market a covered call program I feel is an
invitation to disaster for one's p&l
when you have a market with such large moves as we have had the best option
strategy is to buy calls or
puts on stocks where you have a reasonable idea that the stock will move 3
tomes the premium received during
3/4 of the time remaining in the option.
I have about 30 years experience in option trading as a founding member of
the CBOE and have also started
one of the largest option desks in institutional stock trading and later
commodity trading.
To limit your upside and take most of the downward risk is not a good idea
in today's market
you will wind up with limited returns when called and lousy returns when
not,
-----Original Message-----
From: Gary Funck <gary@xxxxxxxxxxxx>
To: omega-list@xxxxxxxxxx <omega-list@xxxxxxxxxx>
Date: Thursday, February 04, 1999 9:41 PM
Subject: returns on various options strategies
>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 The study is outdated, and covers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
>
|