Home Logon FTA Investment Managers Blog Subscribe About Us Contact Us

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

  An Update On Covered Call Returns
Posted Under: Conceptual Investing
Supporting Image for Blog Post


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 (missing the hat trick 3/3 by 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). Year-to-date through 4/28, the S&P 500 Index has outperformed the CBOE BuyWrite Index by 1.99 percentage points.

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

There were 12 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 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. This income comes at a potential cost, however, as returns can be capped during periods where the market is performing exceedingly well. As the table shows, the CBOE BuyWrite Index outperformed the S&P 500 Index in five of the seven periods where the S&P 500 Index posted annualized total returns of 10% or less. For comparison, the CBOE BuyWrite Index underperformed the S&P 500 Index in all 12 of the years where the S&P 500 Index posted returns of more than 10%.

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.

Download a PDF of this post, please click here

Posted on Tuesday, May 2, 2023 @ 12:15 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 Commentary and Analysis
Market Commentary Video
Monthly Talking Points
Quarterly Newsletter
Market Observations
Subscribe To Receive Email

S&P 500 Index Dividend Payout Profile
Sector Performance Via Market Cap
Technology Stocks And Semiconductors
A Snapshot of Bond Valuations
Growth Vs. Value Investing
Sell In May And Go Away?
S&P 500 Index Dividends & Stock Buybacks
The Only Constant Is Change
One Measure Of Corporate Cash Holdings
Money Market Fund Assets Hit New All-Time High
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.