This Covered Call Index Tends To Outperform The S&P 500 When Stock Returns Are Modest Or Negative
Supporting Image for Blog Post

 
View from the Observation Deck  
  1. From 2003-2020, the CBOE S&P 500 BuyWrite Index (an index designed to measure a covered call strategy) outperformed the S&P 500 Index in just four of the 18 calendar years. We chose 2003 because it was the first year of a new bull market. 
  2. For comparative purposes, from 1926-2020 (95 years), the S&P 500 Index posted an average annual total return of 10.28%, according to Morningstar/Ibbotson Associates.
  3. While covered call options can generate an attractive level of current income, they can also cap the potential for capital appreciation.
  4. The use of a covered call portfolio tends to be most beneficial to investors when the stock market posts down years (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 or in 2018.
  5. Covered call writing tends to be less beneficial when stock market returns are above 10%, such as in 2010, 2012, 2013, 2014, 2016, 2017, 2019 and 2020 (see table). 
  6. A Bloomberg survey of 22 equity strategists found that their average 2021 year-end price target for the S&P 500 Index was 4,199 as of 5/14/21, according to its own release. The highest and lowest estimates were 4,600 and 3,800, respectively. 
  7. As of 5/14/21, the S&P 500 Index stood at 4,173.85, 1.39% below its all-time high of 4,232.60 set on 5/7/20, according to Bloomberg. That currently puts the index right around the 4,199 average target. 
  8. The 4,199 average price target suggests there is a chance the S&P 500 Index could finish the year within proximity of where it stands today. 
  9. If so, the remainder of 2021 could resemble the market climate described in point 4.    
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 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, May 18, 2021 @ 1:05 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.