This Covered Call Index Tends To Beat The Broader Market In Low And Negative Return Climates
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View from the Observation Deck  
  1. From 2002-2017, the CBOE S&P 500 BuyWrite Index (an index designed to measure a covered call strategy) outperformed the S&P 500 Index in five of the 16 calendar years. It has lagged year-to-date thru 3/9/18 (see table).
  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 a covered call portfolio tends to be most beneficial to investors when the stock market posts down years (2002 & 2008) and when returns range from 0% to 10% (2007, 2011 and 2015), though the BuyWrite Index did not outperform the S&P 500 Index in 2005.
  4. Covered call writing tends to be less beneficial when stock market returns are well above 10%, such as in 2012, 2013, 2014, and 2017 (see table). 
  5. As of 3/9/18, the S&P 500 Index stood 3.00% below its all-time high of 2,872.87, set on 1/26/18, according to Bloomberg. 
  6. We believe that corporate earnings growth determines the direction of stock prices over time. 
  7. Bloomberg's 2018 and 2019 consensus earnings growth rate estimates for the S&P 500 Index were 16.59% and 10.30% as of 2/28/18. That 2018 target is well above the 0% to 10% range.
  8. From 1926-2017 (92 years), the S&P 500 posted an average annual total return of 10.16%, according to Ibbotson & Associates/Morningstar.
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.

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Posted on Tuesday, March 13, 2018 @ 1:59 PM

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.