Home Logon FTA Investment Managers Blog Subscribe About Us Contact Us

Search by Ticker, Keyword or CUSIP       
 
 
 
Blog Home
Bob Carey
Chief Market Strategist
Bio
X •  LinkedIn
 

  Covered Calls May Be Conducive For This Market Climate
Posted Under: Broader Stock Market
Supporting Image for Blog Post

 
View from the Observation Deck 
  1. From 2000-2013, the CBOE S&P 500 BuyWrite Index (an index designed to measure a covered call strategy) outperformed the S&P 500 in six of the 14 calendar years.
  2. While covered call options can generate an attractive level of current income, they also can cap the potential for capital appreciation.
  3. The use of covered calls tends to be most beneficial to investors when the stock market posts down years (2000, 2001, 2002 & 2008) and when returns range from 0% to 12% (2004, 2005, 2007 & 2011).  
  4. From 1926-2013, the S&P 500 posted an average annual total return of 10.08%, according to Ibbotson & Associates/Morningstar. That average sits near the upper end of the 0% to 12% range.
  5. Covered call writing tends to be less beneficial when stock market returns are well above their normal range, such as in 2013, when the S&P 500 posted a total return of 32.39% (see chart).
  6. Today, the S&P 500 stands about 5.0% below its all-time high of 1848.38 set on 1/15/14. At current levels, we believe that corporate earnings growth will have the greatest influence on the direction of stock prices.
  7. The 2014 estimated earnings per share growth for the S&P 500 was 9.61% on 2/4/14, according to Bloomberg. That target fits nicely into the 0% to 12% range.
This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance. The CBOE S&P 500 BuyWrite Index (BXM) is designed to track a hypothetical buy-write strategy on the S&P 500. It is a passive total return index based on (1) buying an S&P 500 stock index portfolio, and (2) "writing" (or selling) the near-term S&P 500 Index (SPXSM) "covered" call option.

To Download a PDF of this post, please click here.
Posted on Tuesday, February 4, 2014 @ 4:08 PM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Search Posts
MARKET ANALYSIS
Market Commentary and Analysis
Market Commentary Video
Monthly Talking Points
Quarterly Newsletter
Market Observations
Subscribe To Receive Email
 


 PREVIOUS POSTS
Taking a Broad Investment Perspective
Yield On Preferred Securities Still Attractive On A Relative Basis
A Reminder To Investors That REITs Are Financials
Stay Warm and Stay Bullish
Some Interesting Parallels Between 2003 & 2013
The S&P 500 Is Still Not Expensive Based On Historical Standards
Semiconductor Sales Were A Good Barometer For The Technology Sector In 2013
The Trend For Stock Dividends Is Up
How Much Are You Willing To Pay For That Yield?
The Rise In Stock Dividend Payouts Encouraging On Two Fronts
Archive
Skip Navigation Links.
Search by Topic
Skip Navigation Links.

 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
Follow First Trust:  
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2024 All rights reserved.