Option-Writing Strategies in a Low-Volatility Framework

Posted: 8 Feb 2017

See all articles by Jason C. Hsu

Jason C. Hsu

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

Donald He

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

Neil Rue

Pension Consulting Alliance

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2015

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.

Suggested Citation

Hsu, Jason C. and He, Donald and Rue, Neil, Option-Writing Strategies in a Low-Volatility Framework (November 1, 2015). Journal of Investing, Vol. 24, No. 3, Fall 2015. Available at SSRN: https://ssrn.com/abstract=2913255

Jason C. Hsu (Contact Author)

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

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Suite 900
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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

Donald He

Allianz Global Investors US LLC ( email )

600 W Broadway
30th Floor
San Diego, CA 92101
United States
6196872826 (Phone)

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

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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