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Traditionally, the "Buy-Write Strategy" consists of selling, or writing, call options on a share-for-share basis against purchased or owned stocks. A variation on traditional covered writing is to sell index calls against a group of owned stocks, the performance of which closely matches the index.

In the following example of an S& P 500 Buy-Write Strategy, assume that your client owns a portfolio of stocks that closely follows S& P 500 Stock Index. Also assume that the value of the portfolio is $85,000, the S& P 500 Index is 850 and it is 30 days prior to September expiration. If your client has a neutral forecast for the S& P 500 Stock Index over the next 60 days and would like some additional income, then selling a 30-day 850 SPX Index call at 40, or $4,000, might be appropriate. Table 1 and Figure 1 show the profit/loss results of this strategy at expiration. Taxes, commissions and other transaction costs have been omitted for the sake of simplicity.





Table 1 and Figure 1 show that covered writing increases in stable or declining markets and under performs in rising markets. Positive returns are limited to an index level equal to strike price plus call premium. Above that point, gains in the S&P portfolio are offset by losses in the short call option. Below the break-even point at expiration, the strategy results in a loss, but the break-even point for covered writing is lower than for outright ownership of stocks and portfolios.


The BXM Index is a passive total return index based on selling near-the-money SPX Index calls against a S&P 500 stock index. Calls are sold monthly and will have approximately one month remaining to expiration. The strike price of the calls is just above the prevailing index level, i.e., slightly out of the money. Each time a new call is written, it is assumed to be written at the reported bid price, usually at 10:00 a.m. Chicago time on the third Friday of the month. The SPX call is held until its expiration, at which time the profit (or loss) is added to (or subtracted from) the portfolio’s total value. Every month a new one-month, at-the-money call is written. There is no guarantee that all investors will be able to sell a call at the reported bid price, and investors attempting to replicate the BXM Index should discuss timing and liquidity issues with their brokers.

Figure 2 shows how the BXM Index has performed from June 1988, through December 2002. June 1998 was chosen as the starting date, because that was when Standard and Poor's Corporation began calculating the S&P 500 Stock Index using daily dividends. During the period in Figure 2, the BXM Index had annualized returns of 12.1%, while the S&P 500 Stock Index had annualized returns of 11.1%




Portfolio managers are not only interested in the level of returns; they are also interested in the volatility or standard deviation of returns. Figure 3compares both the returns and the standard deviation of those returns for seven indexes. The BXM Index had a standard deviation of returns of 10%, and the S&P 500 Total Return Index had a standard deviation of 14.9%. More detailed information is available on the Web site of the CBOE at www.cboe.com/bxm.




Covered writing with SPX call options could be attractive to clients who own portfolios that closely follow the S&P 500 Stock Index and who predict that their stocks will be trading in a narrow range. Other clients, with portfolios that follow the S&P 500 Stock Index, who seek index-like returns, might consider repeated writing of index calls in an effort to match BXM Index. The goal of such a strategy would be to diversify portfolios and boost risk-adjusted rates of return.

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document are available from your broker or The Options Clearing Corporation, 400 S. LaSalle Street, Chicago, IL 60605. CBOE and Chicago Board Options Exchange are registered trademarks of the Chicago Board Options Exchange, Incorporated. 2003 Chicago Board Options Exchange, Incorporated, All Rights Reserved.