News

Options generate better returns - says SIRCA research

February 17, 2004

SIRCA has today released a report commissioned by Australian Stock Exchange (ASX) that calls into question the practice employed by the majority of Fund Managers of tracking an index such as the S&P/ASX 200 Accumulation Index.

SIRCA and its research partner, Capital Markets Cooperative Research Centre (CMCRC) Ltd, found that an alternative strategy, known as a ‘Buy Write’ strategy, produced returns 23 percent higher* than those produced by following the S&P/ASX 200 Accumulation Index, and had a lower risk profile over the 14 year period of the study.

The Buy-Write strategy is an investment strategy in which an investor buys a stock, or a basket of shares, and also writes covered-call options that correspond to the stock, or basket of shares. Covered-call writing is the strategy of writing call options against shares already owned and lodged as collateral.

“SIRCA research has found that a Buy-Write strategy outperforms the S&P/ASX200 Accumulation Index in the Australian equity market, generating higher returns and experiencing lower risk.” said Dr Elvis Jarnecic, Research Director, SIRCA. "This research suggests that this superior performance is driven by over-pricing of index call options. By benchmarking to this strategy equity portfolio managers can achieve returns superior to the S&P/ASX200 Accumulation Index.”

The study follows a seminal work in the US by one of the leaders in options pricing theory, Robert Whaley. His 2002 study found that a Buy-Write strategy out performed the S&P500 Index, generating positive returns including the cost of trading the option.

SIRCA advises that the strategy is so popular and successful in the US that it has spawned a Buy-Write index produced by the Chicago Board of Exchange (CBOE). That index is used by US equity portfolio managers to benchmark the performance of Buy-Write options funds, and other strategies for options in equity portfolios. ASX is currently investigating the possibility of launching a Buy-Write index for the Australian Market.

Michael Roche, Executive General Manager of Market Services at ASX said: “This type of Australian research is welcome and overdue. Australian equity fund managers need to look closely at these results, as they point to ways managers can enhance returns and reduce risk in the equity market.”

Further information and examples on this strategy can be found at:
http://www.asx.com.au/markets/l4/StrategyLibraryCoveredWrite_AM4.shtm

A copy of the report can be downloaded at:
http://www.asx.com.au/markets/pdf/Buy-Write_finalFeb2004.pdf