Option-Writing Strategies in a Low-Volatility Framework

Posted: 8 May 2014 Last revised: 7 Feb 2017

See all articles by Donald He

Donald He

Allianz Global Investors US LLC; University of California, Los Angeles (UCLA) - Anderson School of Management

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Neil Rue

Pension Consulting Alliance

Multiple version iconThere are 2 versions of this paper

Date Written: April 30, 2014

Abstract

Covered call buy-write strategies have risk-return profiles that are similar to those of low volatility equity portfolios, and both approaches appear to extract return premium from investors with leverage constraints and a preference for lottery-like bets. We analyzed simulated long-term (1996-2012) returns of buy-write strategies using one-month and three-month call options on the S&P 500 Index, across a range of strike levels, with monthly and quarterly rebalancing. We found that monthly rebalancing of three-month options generated the most favorable results. We also found that the improvement in risk-adjusted performance achieved with buy-write strategies comes from the skewness premium earned for accepting exposure to the tail risk of substantial losses. In addition, we determined that, due to differences in factor loadings, a buy-write strategy would likely serve well to diversify the risks of a low volatility equity portfolio.

Keywords: Low volatility, covered call, preference for lottery, leverage constraints, skewness premium

Suggested Citation

He, Donald and Hsu, Jason C. and Rue, Neil, Option-Writing Strategies in a Low-Volatility Framework (April 30, 2014). Journal of Investing, Vol. 24, No. 3, 2015 (Fall), pp. 116-128. Available at SSRN: https://ssrn.com/abstract=2433676 or http://dx.doi.org/10.2139/ssrn.2433676

Donald He (Contact Author)

Allianz Global Investors US LLC ( email )

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University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

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Jason C. Hsu

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

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HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Neil Rue

Pension Consulting Alliance ( email )

411 NW Park Avenue
Suite 401
Portland, OR 97209-3227
United States

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