Option Write Strategies versus the S&P 500

A tweet today https://twitter.com/SeekingAlpha/status/1125749396069466112 posted some big "risk-adjusted" numbers for the CBOE CallWrite (BMX) and PutWrite (PUT) Indices versus the S&P 500. I think this tweet is misleading.

First of all, the concept of risk adjusted returns in my opinion does not really work for the great majority of investors. Only very few professional investors, if any, get paid on risk-adjusted returns. Risk-adjusted returns DO make underperforming investments look better!

Back to option writing. Let's compare the returns of call and put option writing to the S&P. Note that investors cannot own the BMX and PUT indexes. You CAN buy ETFs that track these indexes. Two "major" ETFs that do this are the Invesco S&P 500 BuyWrite ETF (symbol PBP) and the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW). In fairness, I'll compare these to the SPDR S&P 500 ETF (SPY), an S&P 500 index you CAN buy.

In theory, call writing should beat the S&P during flat and slightly bearish periods. Put writing should beat the S&P during flat and slightly bullish periods.

This long-term chart compares the PBP from its 12/27/07 inception with the SPY:

The PUTW started trading 12/25/2016 and the shorter term comps are shown below:

Source: Yahoo Finance "Historical Prices" "Adj close" downloaded 5/7/2019.

Aside from the obvious long and short term outperformance of the SPY over the PBP and PUTW, we have to acknowledge the writes seem to have fewer drawdowns. Ok, but how do you cherry pick just those periods that have flat to near-flat returns? Short answer: you don't. You can't so I see no way to justify this admittedly peculiar investment strategy.

One last note. There are those who will say that professional money managers do not reflect their stated strategies and further claim that individual investors can easily beat mutual funds and ETFs. My answer: the reason pros apparently underperform individual investors is because pros report audited results!   

For the spreadsheets supporting this post just ask.  

Feel free to post comments.

Disclaimer: Posts are for education only and not investment advice, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.