Why Would Anyone in Their Right Mind Buy a Mutual Fund Ever Again?
While reviewing several academic studies on the benefits of covered call writing, I came upon one of my favorite studies. This study can be found in an October 2006 study generated by Callan Associates, which is also available at the Chicago Board Options Exchange website. The study is entitled “An Historical Evaluation of the CBOE S&P 500 Buy Write Index Strategy”.
After reading the document on my morning commuter ride this morning, it felt so invigorating it was as if I reading it for the very first time. Here is a short excerpt from the study:
Call Premiums as a Source of Return
“Selling index options 12 times per year produces significant income. Whaley (2002) and Feldman and Roy (2005) demonstrated that implied volatility reflected in the price of S&P 500 options is often higher than realized volatility, suggesting that calls trade at a persistent premium to their fair value.” Courtesy Callan Associates. 2006
“The CBOE BXM call premiums earned as a percentage of underlying value, January 1, 1990 to August 31, 2006, plotted against the CBOE Volatility Index (VIX), a measure of expected stock market volatility (the VIX debuted in January 1990). The average monthly premium since January 1, 1988 is 1.64%, an annualized rate of 21.49%.
Premium levels are closely tied to volatility expectations; premiums rose sharply with volatility in the bull market of the late 1990s and through the sharp market decline in 2000–02. Both premiums and expected volatility have since subsided to the levels of the early 1990s”
Option sellers receive lower portfolio volatility, comparable market returns of the S&P 500, monthly income providing a cushion during bear market declines and virtually the same risk adjusted returns as the Lehman 20 year Bond Index as measured by the Sharpe Ratio.
Why would anyone in their right mind buy a mutual fund ever again?
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