Had an interesting conversation with an old classmate who, in his apparent retirement, has taken a liking to selling options. I love TD Ameritrade and admire TDA's educational work-far better than almost ALL investment research online. BUT, we have to be honest here, option income a siren song.
If option writing was such a good strategy, option income funds would be such good funds*. Well, what do you think? First, lets try and find any option income fund (they were popular in the 1980s and not so much, today).
Eaton Vance**, a venerable old-money fund manager, runs a handful of option writing funds. Let's look at them over the long-term:
SPY = SPDR S&P 500 ETF Trust (SPY)
ETV = Eaton Vance Tax-Managed Buy-Write Opportunities Fund (ETV)
ETB = Eaton Vance Tax-Managed Buy-Write Income Fund (ETB)
ETW = Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund (ETW)
EXD = Eaton Vance Tax-Advantaged Bond and Option Strategies Fund (EXD)
Source: Yahoo Finance
With the S&P up 500%, the option funds, up 300-400% all lag,
Almost sixteen years seems like a good period to review the option writing strategy. Was this cherry-picked? Well, it so happens that 4/27/2005 was the first Yahoo price date for the earliest fund, the flagship ETB fund. The others started trading after that date. This is a misleading yet truthful picture of these funds. Of course, the SPY has been trading long before that date and is used, as always, for the comparison benchmark.
Let's look at a true comparison, using the first date in common for all five funds. 6/25/2010 is the first date in Yahoo for the youngest EXD blended tax advantaged bond and option fund:
The roughly ten-year period didn't change much. The S&P still beat option funds by 150% or more. So, did we cherry-pick again? Here's the five year period:
The S&P still beats by roughly 100%. Let's look at the 2020-Present time period. Here, the results narrow.
With EXD up 33% and SPY up 44%. the lead narrows to less than 10 points. Finally, lets look at what these funds did for us lately-the year-to-date 12/31/2020 to 10/15/2021 numbers:
NOW you can accuse me of cherry-picking! The SPY is smack dab in the middle of the Eaton Vance option fund returns! Ranging from 26% to 15%, the EV funds comp well with the SPY 20% ytd gain.
As one can see, you have to work hard to get option writing to beat the S&P.
*The idea here being that if the smartest, richest traders in the world, public fund managers, can't do it. Nobody can! The reason why so many fund manager's do worse than internet chatroom traders is because fund manager results are audited!
**While it may seem so, I am NOT picking on Eaton Vance. Option income is a tough strategy, especially, in bull markets. You keep giving up gains for pittance. Also, EV is one of the oldest managers out there with old money clients who primarily want to keep their money. These are wonderful gains, where many other managers have given up on option income funds.
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© 2021 George Rahal.
