Covering the World: Global Evidence on Covered Calls

24 Pages Posted: 28 Jun 2017 Last revised: 21 Jul 2017

See all articles by Roni Israelov

Roni Israelov

AQR Capital Management, LLC

Matthew Klein

AQR Capital Management, LLC

Harsha Tummala

AQR Capital Management, LLC

Multiple version iconThere are 2 versions of this paper

Date Written: June 28, 2017

Abstract

Typical covered call strategies may be decomposed, using a risk and performance attribution methodology, into three components: equity exposure, short volatility exposure, and equity timing. This paper applies that attribution methodology to covered calls on eleven global indexes. We find that, in our cross-section of indexes, the risk and return contributions of the three components are remarkably consistent. Across the board, the covered call’s equity exposure is responsible for most of the strategy’s risk and return, while the short volatility exposure has the highest Sharpe ratio of the strategy’s components. The returns from the equity timing exposure are statistically insignificant in all eleven indexes, yet this exposure contributes a relatively large amount of the strategy’s risk.

These results provide further evidence that managing equity exposure in covered calls provides superior risk-adjusted returns. Further, a globally-diversified portfolio of risk-managed covered calls may be viewed as a defensive alternative to global equity, providing similar returns with lower volatility and lower drawdowns.

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, G12, G13

Suggested Citation

Israelov, Roni and Klein, Matthew and Tummala, Harsha, Covering the World: Global Evidence on Covered Calls (June 28, 2017). Available at SSRN: https://ssrn.com/abstract=2990522 or http://dx.doi.org/10.2139/ssrn.2990522

Roni Israelov (Contact Author)

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States

HOME PAGE: http://www.aqrcapital.com

Matthew Klein

AQR Capital Management, LLC ( email )

Greenwich, CT
United States
203-742-3624 (Phone)

Harsha Tummala

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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