PutWrite versus BuyWrite: Yes, Put-Call Parity Holds Here Too

Abstract

The CBOE S&P 500 PutWrite Index has outperformed the CBOE S&P 500 BuyWrite Index by approximately 1.1 percent per year between 1986 and 2015. That is pretty impressive. But troubling. Yes – troubling – because the theory of put-call parity tells us that such outperformance should be almost impossible via a compelling no-arbitrage restriction. This paper explains the mystery of this outperformance, which has implications for portfolio construction.

Keywords: Covered Call, Covered Calls, Call Overwriting, Overwriting, Options, Volatility Risk Premium, Variance Risk Premium, BuyWrite, Buy-Write, PutWrite, Put-Write

JEL Classification: G00, G10, G11, G11, G12, G13