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October 19, 2022 | 5 Minute Read

In many circumstances, investors turn to fixed income when anticipated equity returns are bleak. But 2022 thus far has been far from normal. With the S&P 500 Index off to its fourth-worst start to a year ever and the US Aggregate Bond Index closely following suit, investors have been seeking shelter. Enter Buy-Write. Buy-Write strategies, which simultaneously write covered call options on long equity exposure, may be a viable solution for investors hoping to generate income and dampen volatility in an environment that is less supportive of risk assets.

While Buy-Write strategies, by design, may trail in strongly rising markets, periods of moderate equity market returns have historically been a favorable time to invest in these strategies. In such environments, performance relative to the S&P 500 has been positively skewed in both frequency and magnitude. Since 1986, when the S&P 500 has delivered returns less than 7%, Buy-Write strategies have outperformed 85% of the time with average excess performance of 4.7% (Exhibit 1).

Exhibit 1: Buy-Write Performance During Periods of Varying Equity Market Returns

Source: Bloomberg and Goldman Sachs Asset Management. As of September 30, 2022. Chart shows historical performance of the Cboe S&P 500 BuyWrite Index relative to the S&P 500 Index since earliest common index inception, July 1, 1986, in terms of both frequency and magnitude on a rolling 12-month basis, considering periods in which the S&P 500 Index returned greater than 7% and less than 7%. Past performance does not guarantee future results, which may vary.

Another environment that has traditionally been supportive of Buy-Write strategies is one of elevated and increasing market volatility. Income generation may act as a buffer to market selloffs, and when expected volatility is high, so too are the option premiums generated by such strategies. VIX levels that are above historical average and rising may present challenges for traditional equity exposure, but as shown in Exhibit 2, these conditions have been supportive of option-writing strategies. If we continue to experience episodic volatility stemming from uncertainty in growth, geopolitics, and the pace of US rate hikes, Buy-Write strategies may be poised for higher income and excess returns.

Exhibit 2: Performance during Periods of High and Rising Volatility

Source: Bloomberg and Goldman Sachs Asset Management. As of September 30, 2022. Chart shows historical performance of the Cboe S&P 500 BuyWrite Index relative to the S&P 500 Index in terms of both frequency and magnitude on a monthly basis. The chart considers periods when the Cboe Volatility Index has increased month-over-month and is above the historical average since earliest common index inception, January 3, 1990. Past performance does not guarantee future results, which may vary.

Additionally, Buy-Write strategies have consistently provided lower volatility than the S&P 500, with greater protection being offered during the most acute periods of stress. As seen in Exhibit 3, Buy-Write strategies’ monthly volatility has been, on average, 5.5 percentage points lower than that of the S&P 500.

Exhibit 3: Relative Volatility between Buy-Write and S&P 500

Source: Bloomberg and Goldman Sachs Asset Management. As of September 30, 2022. Chart shows monthly historical standard deviation of the Cboe S&P 500 BuyWrite Index relative to the S&P 500 Index since earliest common index inception, July 1, 1986. Past performance does not guarantee future results, which may vary.

The risk/return profile of today’s equity markets has left many investors shying away from the asset class. However, in our view, it is the right time to consider Buy-Write.

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Glossary

“US Aggregate Bond Index” refers to Bloomberg US Aggregate Bond Index.

“Buy-Write strategy” refers to an investment strategy in which an investor buys a stock or a basket of stocks and writes covered call options that correspond to the stock or basket of stocks, as measured by the Cboe S&P 500 BuyWrite Index. A Buy Write Strategy's maximum loss is equal to the full value of shares minus the premium collected from the options.

“Volatility” refers to standard deviation, a statistical measure of volatility which indicates the “risk” associated with a return series.

“Average excess performance” refers to the mean of returns of one index relative to that of another.

“VIX” refers to the Cboe Volatility Index.

“pp” refers to percentage points, a unit represented by one percent.

Risk Considerations

Equity securities are more volatile than bonds and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies.

Investments in fixed-income securities are subject to credit and interest rate risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Buy-write strategies are subject to market risk, which means that the value of the securities in which it invests may go up or down in response to the prospects of individual companies, particular sectors and/or general economic conditions. They are also subject to the risks associated with writing (selling) call options, which limits the opportunity to profit from an increase in the market value of stocks in exchange for up-front cash at the time of selling the call option. In a rising market, the strategy could significantly underperform the market, and the options strategies may not fully protect it against declines in the value of the market.

The above are not an exhaustive list of potential risks. There may be additional risks that are not currently foreseen or considered.

Index Benchmarks

The Bloomberg US Aggregate Bond Index represents an unmanaged diversified portfolio of fixed income securities, including US Treasuries, investment grade corporate bonds, and mortgage backed and asset-backed securities.

The S&P 500 Index is the Standard & Poor’s 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices. The index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index.

The Cboe S&P 500 BuyWrite Index measures the total rate of return of a hypothetical “covered call” strategy applied to the S&P 500 Index. This strategy consists of a hypothetical portfolio consisting of a “long” position indexed to the S&P 500 Index on which are deemed sold a succession of one-month, at-the-money call options on the S&P 500 Index listed on the Cboe exchange.

The Cboe Volatility Index (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500® Index call and put options.

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.

The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein.

Any statement contained in this presentation concerning U.S. tax matters is not intended or written to be used and cannot be used for the purpose of avoiding penalties imposed on the relevant taxpayer. Notwithstanding anything in this page to the contrary, and except as required to enable compliance with applicable securities law, you may disclose to any person the US federal and state income tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind. Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security. Views and opinions are current as of the date of this commentary and may be subject to change, they should not be construed as investment advice.

This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.

THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

Confidentiality

No part of this material may, without Goldman Sachs Asset Management’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

Date of First Use: October 11, 2022. 293144-OTU-1681369.