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  This Covered Call Index Tends To Outperform The S&P 500 When Returns Are Modest Or Down
Posted Under: Conceptual Investing
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View from the Observation Deck  

  • Covered call strategies tend to be most beneficial when the stock market posts negative returns, or when returns range from 0%-10%

The S&P 500 Index posted negative total returns just three times in the table above. The CBOE BuyWrite Index outperformed the S&P 500 Index in two of those three years (underperforming by a mere 0.39 percentage points in 2018). For comparison, there are four years in the table where the S&P 500 Index posted returns between 0% and 10%. During those time periods, the CBOE BuyWrite Index outperformed the S&P 500 Index in three of the four years (missing the fourth year by 0.66 percentage points in 2005).

  • Covered call options can generate an attractive income stream, but they can also cap the potential for capital appreciation

There were 13 years in the table where the S&P 500 Index posted total returns of 10% or more. The CBOE BuyWrite Index underperformed the S&P 500 in every one of them.


Takeaway: Covered call strategies may offer a unique alternative to the S&P 500 Index. The income they provide has generally led to outperformance during negative or moderately positive periods for the overall market. This income comes at a potential cost, however, as returns can be capped during periods where the market is performing exceedingly well. 


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 Index is an unmanaged index of 500 companies 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.

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Posted on Thursday, January 12, 2023 @ 2:23 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.
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