Would you have been better off selling covered calls over the last few months, or just buying and holding the underlying asset? The following chart shows the returns for several buy-write indexes on various global equity indexes along with crude oil and gold. These indexes sell out of the money call options against long positions in the underlying assets, and returns are displayed here as the difference over the past one and three months between the buy-write indexes and the underlying assets.
Covered call index returns. Source: Condor Options, CBOE, Bourse de Montréal, Nikkei, Korea Exchange, STOXX, S&P, Credit Suisse
Selling calls against long positions has been a losing and/or trivial approach in each of these cases, with the exceptions of the Nikkei over the last month and in crude oil. Underperformance by call selling strategies is to be expected during periods of strength in the underlying, which we’ve seen in developed market stocks, and similarly the drop in crude prices since early September has meant that the premium from selling upside calls provided a small buffer. I suppose that’s another way of saying that the performance of these buy-write indexes is still dominated by the price returns of the underlying; the contribution from call selling is more evident over the long term.
Something else that stood out to while I was gathering this data was that the options-based approaches with the largest footprint across global exchanges are covered call indexes and indexes that use the VIX methodology. It sort of feels like we skipped a step or two in there. On the other hand, a) I guess it’s unlikely that there is a lot of unmet extant demand for e.g. time spread indexes, and b) ongoing anecdotal evidence suggests that many traders who don’t trade options still don’t understand the VIX methodology anyway.
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