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    A BUY-WRITE STRATEGY

    The markets are unpredictable, but a buy-write strategy may help with the ups and downs.

    What is a Buy-Write Strategy?

     

    A typical Buy-Write strategy will hold (“Buy”) a diversified basket of stocks to mimic a particular index – the S&P 500, for instance. It will simultaneously sell (“Write”) related call options seeking to generate additional income from the premium.

    How Does a Buy-Write Strategy Work?

    1. Buy

     

    a diversified basket of equities to provide broad equity exposure. May maintain similar sector weights to a broad index, but tilt towards yielding equities within each sector.

    2. Write (Sell)

     

    sell related call options covering all or a portion of the portfolio to generate premium income.

    3. Outcome

     

    forfeits some potential equity upside in exchange for enhanced income today, above that from equity dividends alone.

    The Merits of a Buy-Write Strategy

     

     

    Defensive Return Profile*

     

    In negative or flat to single-digit markets, selling call options can provide additional returns. With its option premium “cushion,” Buy-Write strategies may demonstrate a high frequency of outperformance in these markets relative to their benchmark. Buy-Write strategies may underperform in exuberant markets (>10% 1-year returns).

     

    *Frequency of Outperformance: Considering rolling one-year returns (measured quarterly, over 20 years), CBOE S&P 500 2% OTM Buy-Write Index—a reasonable proxy for the Buy-Write strategy universe in aggregate—vs. S&P 500 Index.

     Source 1

    Lower Highs But Higher Lows

     

    In the more challenging equity return environment we anticipate, a Buy-Write strategy may improve investor experience via a more defensive, muted-volatility return profile. A smoother glide path may be more likely to keep investors engaged with their investment programs—and with equities—to the benefit of their long-term financial health..

     Source 2

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