Consider that the S&P 500 rose 360 percent during this 23.5-year period, from 273.50 at the end of June 1988 to 1257.60 by the end of December 2011, and yet a covered-call strategy that generated monthly income in exchange for capping monthly gains still outperformed a long-only S&P 500 portfolio.
The contrast in performance was dramatic (see table "Covered Calls Outperform over the Long Term: Return and Risk").īoth S&P 500 buy/write indexes beat the S&P 500 index while incurring less volatility-the best of both worlds. Many investors think of covered calls as defensive because they provide an income cushion, which is true, but they're also a bullish strategy that often outperforms just owning the shares.Ī new study by Asset Consulting Group (ACG), covering the period between June 1988 and December 2011, underscores the superiority of covered calls over a simple buy-and-hold strategy.ĪCG's study compares the S&P 500's return with the return of two S&P 500 buy/write indexes: the CBOE S&P 500 BuyWrite Index (BXM), which sells S&P 500 covered calls every month at strike prices "at the money" (i.e., the same price as the underlying index) and the CBOE S&P 500 2% OTM BuyWrite Index (BXY), which sells covered calls every month at strikes 2 percent above the price of the underlying index.įor example, if the S&P 500 were trading at 1,000, the BXM would sell call options with the strike price of 1,000 and the BXY would sell call options with the strike price of 1,020. I demonstrated how you could have sold periodic covered calls on Chevron-a stock that appreciated 28.7 percent over a two-year period-and still would have outperformed a simple buy-and-hold strategy. In an article for Personal Finance, an investment advisory service from Investing Daily, I debunked that myth by providing a real-life example involving Chevron Corp ( CVX). Unfortunately, many investors are under the mistaken impression that this strategy underperforms in bull markets. Selling covered calls generates additional income and lowers the break-even cost basis of stock you already own, thus reducing the downside risk of stock ownership at all price points. Besides his passion for analyzing and writing about stocks, Jim likes to hike in the desert Southwest, vacation in Las Vegas, play tennis, and feed his toddler son Cheerios.Today's rock-bottom interest rates and overpriced financial assets have created a low-return investment world that requires proactive yield-enhancement techniques such as covered calls, to generate the additional investment rate of return needed to retire comfortably. After attending business school, Jim switched gears to the investment realm full-time, working for a university endowment, a private wealth management firm, an insurance and financial planning company, and as a Senior Analyst for an online investment newsletter service that encourages the wearing of funny hats.Ī possible but unlikely descendant of legendary brawler and boatman Mike Fink, Jim defies his heritage, believing that investing success requires patience and analysis, not swashbuckling bravado. Prior to joining Investing Daily, and when not incurring student loans hiding out in academe, Jim practiced telecommunications regulatory law for nine years until he realized that he made more money trading stock options than writing briefs. For good measure, he has been a member of the Illinois and D.C.
Hopelessly overeducated, Jim holds a bachelor's degree from Yale University, a master's degree from Harvard's Kennedy School of Government, a law degree from Columbia University, and an MBA from the University of Virginia's Darden School of Business. Jim also serves as an investment analyst at Investing Daily’s flagship investing publication, Personal Finance. He has traded options for more than 30 years and generated personal profits of more than $5 million. Jim Fink is chief investment strategist for Options for Income, Velocity Trader, and Jim Fink's Inner Circle.
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