In The News

Stock exchange to launch buy-write index

Financial Review - Smarts Investor
16 June 2004
Chris Wright

The Australian Stock Exchange has confirmed plans to launch a new index, the S&P/ASX Buy-Write Index, on July 1.

The index, first foreshadowed in Smart Investor in February, tracks the performance of an investment style known as the buy-write, or covered call, strategy.

This is where an investor buys a stock or index, then sells a call option against it. The idea is that it generates extra revenue (the fee the investor gets for selling the call option) and that in many cases the option will expire without being exercised. Even if it is called, the worst-case scenario is that the investor misses out on some upside.

It is one of the most common derivative strategies in the Australian market, with the lowest risk, and it is particularly useful for investors who do not expect their stocks to move much in price over the short term.

The point of the index is to illustrate how the strategy performs, which is important from the ASX's point of view since options provide it with a steady source of revenue.

The ASX is also touting a report called SIRCA1, released in February, claiming that a buy-write strategy produced a return 23per cent better than the S&P/ASX200 accumulation index over a 14-year period, with a lower risk profile.

Similar studies in the United States prompted a buy-write index offered by the Chicago Board Options Exchange over the S&P 500 Index.

This will not be an index investors can buy or track, but a benchmark to measure their performance against.