Buy-write
Encyclopedia
The term buy-write is used to describe an investment strategy in which the investor buys stocks and writes call options
against the stock position. The writing of the call option provides extra income for an investor who is willing to forgo some upside potential.
commissioned Professor Robert Whaley of Vanderbilt University to compile and analyze relevant data from the time period from June 1988 through December 2001. In April 2002, the index was announced with the publication of "Return and Risk of CBOE Buy-Write Monthly Index" in Journal of Derivatives (Winter 2002). The BXM Index is designed to show the hypothetical performance of a strategy in which an investor buys a portfolio of the S&P 500 stocks, and also sells (or writes) covered call
options on the S&P 500
Index.
Investors have used covered call strategies for more than three decades. As noted in a magazine article “Buy Writing Makes Comeback as Way to Hedge Risk.” Pensions & Investments, (May 16, 2005), two developments have enhanced the interest in covered call strategies in recent years: (1) in 2002 the Chicago Board Options Exchange
introduced the first major benchmark index for covered call strategies, the CBOE S&P 500 BuyWrite Index (ticker BXM), and (2) in 2004 the Ibbotson Associates consulting firm published a case study on buy-write strategies. In 2006 Callan Associates published A Review of the CBOE S&P 500 BuyWrite Index.
The BXM Index won the Most Innovative Benchmark Index award at the 2004 Super Bowl of Indexing Conference.
More than forty new buy-write investment products have been introduced since mid-2004 (see Samples section below).
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
against the stock position. The writing of the call option provides extra income for an investor who is willing to forgo some upside potential.
History
Investors have used exchange-listed options to engage in buy-write strategies since the 1970s, and descriptive articles were published in the The Journal of Portfolio Management in 1978 by Henry Pounds and in 1980 by Yates and Kopprasch (see references section below). However, prior to 2002 there was no major benchmark for buy-write strategies. To help in the development of the CBOE S&P 500 BuyWrite Index (ticker BXM), the Chicago Board Options ExchangeChicago Board Options Exchange
The Chicago Board Options Exchange , located at 400 South LaSalle Street in Chicago, is the largest U.S. options exchange with annual trading volume that hovered around one billion contracts at the end of 2007...
commissioned Professor Robert Whaley of Vanderbilt University to compile and analyze relevant data from the time period from June 1988 through December 2001. In April 2002, the index was announced with the publication of "Return and Risk of CBOE Buy-Write Monthly Index" in Journal of Derivatives (Winter 2002). The BXM Index is designed to show the hypothetical performance of a strategy in which an investor buys a portfolio of the S&P 500 stocks, and also sells (or writes) covered call
Covered call
A covered call is a financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities. If a trader buys the underlying instrument at the same time as he sells the call, the strategy is often...
options on the S&P 500
S&P 500
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...
Index.
Investors have used covered call strategies for more than three decades. As noted in a magazine article “Buy Writing Makes Comeback as Way to Hedge Risk.” Pensions & Investments, (May 16, 2005), two developments have enhanced the interest in covered call strategies in recent years: (1) in 2002 the Chicago Board Options Exchange
Chicago Board Options Exchange
The Chicago Board Options Exchange , located at 400 South LaSalle Street in Chicago, is the largest U.S. options exchange with annual trading volume that hovered around one billion contracts at the end of 2007...
introduced the first major benchmark index for covered call strategies, the CBOE S&P 500 BuyWrite Index (ticker BXM), and (2) in 2004 the Ibbotson Associates consulting firm published a case study on buy-write strategies. In 2006 Callan Associates published A Review of the CBOE S&P 500 BuyWrite Index.
The BXM Index won the Most Innovative Benchmark Index award at the 2004 Super Bowl of Indexing Conference.
More than forty new buy-write investment products have been introduced since mid-2004 (see Samples section below).
Understanding the Expiry Payout of Buy-Write
"The Figure above shows a 3-Dimensional plot of expiry value versus stock price for FCX on expiry saturday versus the option purchased. Please take a few moments to study the chart making careful note of the yaxis which represents the option purchased in the format of (Strike Price)-(Days to Expiry), e.g. 70-10 would be 70 dollars and 10 days to expiry, and 85-101 would be an 85 dollar strike price with 101 days to expiry."Benchmark Indexes for BuyWrite Strategies
- CBOE S&P 500 BuyWrite Index (BXM)CBOE S&P 500 BuyWrite Index (BXM)The CBOE S&P 500 BuyWrite Index is a benchmark index designed to show the hypothetical performance of a portfolio that engages in a buy-write strategy using S&P 500 index call options.-Description:...
- CBOE DJIA BuyWrite Index (BXD)CBOE DJIA BuyWrite Index (BXD)The CBOE S&P DJIA BuyWrite Index is a benchmark index designed to show the hypothetical performance of a portfolio that engages in a buy-write strategy on the Dow Jones Industrial Average .-Descriptions:...
- CBOE Russell 2000 BuyWrite Index (BXR)
- CBOE NASDAQ-100 BuyWrite Index (BXN)
- CBOE S&P 500 2% OTM BuyWrite Index (BXY)
- S&P/ASX Buy-Write Index (Australia) (XBW)
Samples of Buy-write Investment Products
- PowerShares S&P 500 BuyWrite Portfolio (Ticker PBP)
- iPath CBOE S&P 500 BuyWrite Index ETN (ticker BWV)
- Citigroup Funding, Inc. PISTONS Linked to the CBOE S&P 500 BuyWrite Index
- Merrill Lynch's 8% Monthly Income Strategic Return Notes, Linked to the CBOE S&P 500 BuyWrite Index (Ticker BXU)
- Merrill Lynch 8% Strategic Return Notes linked to the CBOE S&P 500 BuyWrite Index (Ticker BXA)
- Morgan Stanley Strategic Total Return Securities (STARS) linked to the BXM Index (Ticker MBS)
- Morgan Stanley 8% Targeted STARS based on CBOE S&P 500 BuyWrite Index (Ticker BWN)
- IQ Investment Advisors S&P 500 Covered Call Fund Inc. (Ticker BEP)
- Eaton Vance Tax-Managed Buy-Write Income Fund (Ticker ETB)
Further reading
- Blake, R. "Investors Are Dusting Off an Old Strategy, Options Overlay; When It Works, It Offers Both Yield Enhancement and Risk Management." Institutional Investor, (Sept. 2002), pp. 173 - 174.
- Callan Associates. A Review of the CBOE S&P 500 BuyWrite Index (BXM). (October 2006).
- Crawford, Gregory. “Buy Writing Makes Comeback as Way to Hedge Risk.” Pensions & Investments, (May 16, 2005).
- Demby, E. R. “Maintaining Speed -- In a Sideways or Falling Market, Writing Covered Call Options Is One Way To Give Your Clients Some Traction.” Bloomberg Wealth Manager, (February 2005).
- Feldman, Barry and Dhuv Roy. "Passive Options-Based Investment Strategies: The Case of the CBOE S&P 500 BuyWrite Index." The Journal of Investing, (Summer 2005).
- Ferry, John. "An Array of Options - A Buy-write Strategy Can Add Some Octane to Portfolios When the Markets Lack Direction." Worth MagazineWorth (magazine)Worth is an American wealth management magazine for high net worth individuals. It is published on a bi-monthly basis and circulated to over 110,000 recipients.-History:Worth was founded in 1992 as a wealth management magazine for high net worth individuals...
, (April 2005), pp. 102 - 104.
- Hadi, Mohammed. "Buy-Write Strategy Could Help in Sideways Market." Wall Street Journal. (April 29, 2006) pg. B5.
- Hill, Joanne, Venkatesh Balasubramanian, Krag (Buzz) Gregory, and Ingrid Tierens. "Finding Alpha via Covered Index Writing." Financial Analysts Journal. (Sept.-Oct. 2006). pp. 29-46.
- Keenan, C. “Mass Appeal It's Still a Niche Market, But More Assets Are Flowing Into Mutual Funds That Use Hedge Fund Techniques.” Institutional Investor, ( July 2004).
- Moran, Matthew. “Risk-adjusted Performance for Derivatives-based Indexes – Tools to Help Stabilize Returns.” The Journal of Indexes. (Fourth Quarter, 2002) pp. 34 – 40.
- Pounds, Henry M. “Covered Call Option Writing: Strategies and Results.” The Journal of Portfolio Management (Winter 1978).
- Roeder, David. "New Funds Try Options to Boost Stock Income." Chicago Sun-TimesChicago Sun-TimesThe Chicago Sun-Times is an American daily newspaper published in Chicago, Illinois. It is the flagship paper of the Sun-Times Media Group.-History:The Chicago Sun-Times is the oldest continuously published daily newspaper in the city...
, (October 10, 2004).
- Schneeweis, Thomas, and Richard Spurgin. "The Benefits of Index Option-Based Strategies for Institutional Portfolios" The Journal of Alternative Investments, (Spring 2001), pp. 44 - 52.
- SIRCA. Return and Risk of Buy-Write Strategies using Index Options -- Australian Evidence (February 2004)
- Smith, Steven. "Covered Calls Move Closer to the Masses" TheStreet.com (April 2003)
- Smith, Steven. “Options on Covered Calls.” RealMoney, (Dec. 20, 2006).
- Tan, Kopin, "Yield Boost -- Firms Market Covered-call Writing to Up Returns." Barron's, (Oct. 25, 2004).
- Tergesen, Anne. "Taking Cover with Covered Calls." Business Week, (May 21, 2001), pp. 132.
- Wasik, J. “Used Wisely, Options Can Help Dodge Stock Losses.” Bloomberg News, (May 15, 2005).
- Whaley, Robert. "Risk and Return of the CBOE BuyWrite Monthly Index" The Journal of Derivatives, (Winter 2002), pp. 35 - 42.
- Woolley, S. “Squeeze Your Portfolio Harder,” BusinessWeekBusinessWeekBloomberg Businessweek, commonly and formerly known as BusinessWeek, is a weekly business magazine published by Bloomberg L.P. It is currently headquartered in New York City.- History :...
, (December 27, 2004).
- Yates, James, and; Robert W. Kopprasch Jr. “Writing Covered Call Options: Profits And Risks” The Journal of Portfolio Management (Fall 1980).