Posted: 12 Jan 2010 Last revised: 29 Aug 2012
Date Written: January 11, 2010
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: 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