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Hewitt EnnisKnupp's BXM Performance Review
Hewitt EnnisKnupp, an investment consulting company, did an analysis of 25 years of buy-write index option writing from 1986 to 2012. The results show that the strategy of writing covered calls on the S&P 500 increases returns and lowers portfolio volatility.
What is BXM?
BXM is the CBOE S&P 500 BuyWrite Index. It is an index value calculated by using a strategy of writing 1-month at-the-money covered calls on the S&P 500.
BXM is not a tradable security, although there are a couple of ETFs that mimic it (albeit with 0.75% expense ratios), including (1) PowerShares S&P 500 ButWrite Portfolio ETF (PBP) and (2) iPath CBOE S&P 500 BuyWrite Index exchange-traded note (BWV).
(Side note for our Canadian readers, there is also the MX Covered Call Writers' Index (MCWX, which tracks a similar strategy of writing monthly covered calls on the iShares of the CDN S&P/TSX 60 Fund.)
Summary Results
From June 1986 through January 2012, the BXM produced a:
- Similar return but lower volatility relative to the S&P 500 Index
- Return in excess of all other comparative indices
- Standard deviation lower than all other equity and commodity indices
- Standard deviation lower than the 30-Year Treasury Index
- Sharpe ratio that was superior to that of other equity and commodity indices evaluated
25 Year Peformance
Over 25 years the annualized return of BXM was as good as or higher than other comparable indices:
While at the same time generating those returns with lower volatility (smaller standard deviation is better):
Shown another way, BXM has higher returns at lower risk:
The conclustion from this study states:
"The BXM tends to underperform the S&P 500 Index during periods of sharply rising markets. In quiet market conditions, the BXM has the potential to outperform the S&P 500 Index due to the premium collected on the sale of the call option. The BXM Index has outperformed the S&P 500 Index in periods of falling markets. This strategy is a potential solution for investors concerned about reducing overall portfolio volatility."
The report from Hewitt EnnisKnupp has many additional charts and figures, such as monthly returns, results over time, rolling 5-year standard deviations, etc. To see all the data, download the complete Hewitt EnnisKnupp BXM performance report.
Mike Scanlin is the founder of Born To Sell and has been writing covered calls for a long time.