Mo have you meandered over to the Yahoo BWB group yet?
Writing options for a living
- Thread starter torontoman
- Start date
Wrong. A delta of 1 (or 0.01 as most would say) means that the option premium will change with 1/100th of the amount the underlyer changes. Nothing more, nothing less.
The probability of it exping ITM is a different function and only approximates the delta value. For the type of statement u r trying to make it is important to use the exact numbers.
Ursa..
I am a bit late to this party,but id you are interested in the merits of option writing,check out
http://www.cboe.com/micro/bxm/Callan_CBOE.pdf
it seems pretty clear that selling puts is was a better strategy than buying the S&P the last 13 years....
http://www.cboe.com/micro/bxm/Callan_CBOE.pdf
it seems pretty clear that selling puts is was a better strategy than buying the S&P the last 13 years....
6 pages of analysis, in-depth comparisons of Sharpe Ratios, not one mention of the word "commissions". I'd really be interested in finding out how much of that whopping 10 BP edge over simply buying and holding the S&P 500 would be eroded away by the commissions and taxes (on writing monthly covered calls) for the 18 years since 1988.
My guess is the buy & hold strategy would come out far ahead.
Their strategy described involves "buying a portfolio of the S&P 500 and writing a covered call against that portfolio". In addition to the option commissions, it also involves the commission of re-buying that portfolio each & every month it is called away from you.
It's a hypothetical analysis, and their study timeframe begins in 1988 (after the crash, how convenient). Originating far before the dawn of the ETF spider, it would've been quite difficult to "buy the S&P 500" and write a call against it, unless they were trading futures.
In any case, the conclusion is that their strategy netted 10BP, yes 0.10% greater annual gain than simply buying and holding the S&P. I'm saying that 0.10% would be wiped out in any real-world scenario where commissions, taxes, and fees come into play.
Actually, the claim is that BXM produces superior risk adjusted returns: same absolute return at lower risk. Here is the summary from the CBOE site:
BXM generated superior risk-adjusted returns over the last 18 years, generating a return comparable to that of the S&P 500 with approximately two-thirds of the risk. (The compound annual return of the BXM was 11.77% compared to 11.67% for the S&P 500, and BXM returns were generated with a standard deviation of 9.29%, two-thirds of the 13.89% volatility of the S&P 500.)
The risk-adjusted performance, as measured by the monthly Stutzer Index over the 18-year period, was 0.20 for the BXM vs. 0.15 for the S&P 500. A comparison using the monthly Sharpe Ratio yielded similar results (0.22 vs. 0.16, respectively), confirming the relative efficiency of the BXM over the 219-month study period.
The BXM underperformed the S&P 500 during most rising equity markets and consistently outperformed the S&P 500 in all periods of declining equity markets, demonstrating the return cushion provided by income from writing the calls.
The BXM generates a return pattern different from that of the S&P 500, offering a source of potential diversification. The addition of the BXM to a diversified investor portfolio would have generated significant improvement in risk-adjusted performance over the past 18 years.
I was aware of that. The question is, by what degree would the real-world factors (comm, fees, taxes) negatively effect the absolute return, and would that effect diminish the benefit (lower risk) of that strategy?