The Efficiency of the Buy-Write Strategy: Evidence from Australia

Posted: 12 Jan 2010 Last revised: 29 Aug 2012

Tafadzwa Mugwagwa

RMIT University - School of Economics, Finance and Marketing

Vikash Ramiah

RMIT University - School of Economics, Finance and Marketing; Financial Research Network (FIRN)

Tony Naughton (Deceased)

RMIT University - School of Economics, Finance and Marketing; Financial Research Network (FIRN)

Date Written: January 11, 2010

Abstract

We examine the performance of the buy-write option strategy (BWS) on the Australian Stock Exchange and analyse whether such an investment opportunity violates the efficient market hypothesis on the basis of its risk and returns. This study investigates the relationship between buy-write portfolios returns and past trading volume and other fundamental financial factors including dividend yield, firm size, book to market ratio, earnings per share (EPS), price earnings ratio and value stocks within these portfolios. We also test the profitability of the buy-write strategy during bull and bear markets. Consistent with the literature, it is observed that BWS offers superior risk adjusted returns for low levels of out-of-moneyness and contrary evidence is observed for deeper out-of-money portfolios. Consistent with a preference for options with a maturity of around three months in Australia, this research shows that quarterly rebalancing periods offer better returns for the BWS.

Keywords: Buy-Write Strategy, Option, Equity, Portfolio Performance, Efficient Market, Market Fundamentals, Market Conditions

JEL Classification: G11, G12, G14, G24, G32

Suggested Citation

Mugwagwa, Tafadzwa and Ramiah, Vikash and Naughton (Deceased), Tony, The Efficiency of the Buy-Write Strategy: Evidence from Australia (January 11, 2010). Available at SSRN: https://ssrn.com/abstract=1535123 or http://dx.doi.org/10.2139/ssrn.1535123

Tafadzwa Mugwagwa

RMIT University - School of Economics, Finance and Marketing ( email )

Business
Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

Vikash Ramiah (Contact Author)

RMIT University - School of Economics, Finance and Marketing ( email )

Business
Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Tony Naughton (Deceased)

RMIT University - School of Economics, Finance and Marketing ( email )

Business
Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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