The CBOE S&P 500 BuyWrite Index
Victor Greco, DiscoverOptions Chief Options Strategist

The Chicago Board Options Exchange (CBOE) publishes a number of different BuyWrite Indexes, with each designed to be a benchmark that tracks the performance of a hypothetical buy-write strategy on a specific stock index.  The "Buy-Write" is an investment strategy in which an investor buys a stock or a basket of stocks, and also writes covered call options that correspond to the stock or basket of stocks.

The oldest and most popular one is the CBOE S&P 500 BuyWrite Index (Symbol: BXM), which tracks the performance of a hypothetical buy-write strategy on the S&P 500 Index.  Data on daily BXM prices is available from June 30, 1986, to the present time.  The BXM is a passive total return index based on (1) buying a representative S&P 500 stock portfolio, and (2) "writing" (or selling) the near-term S&P 500 Index (Symbol: SPX) "covered" call option, generally on the third Friday of each month.

The SPX call written will have about one month remaining to expiration, with an exercise price just above the prevailing index level (i.e., slightly out of the money). The SPX call is held until expiration and cash settled, at which time a new one-month, near-the-money call is written.  Let’s take a look at how it has behaved over the past five years.

BuyWrite1

The blue line represents the performance of the BuyWrite Index (BXM), while the red line represents the performance of the S&P 500 itself (SPX).  In a trending market, a covered call will generally outperform the asset itself.  The strategy also provides option premium income that can help cushion downside moves, but will often under perform in a rising market.  Thus, some Buy-Write strategies significantly outperformed stocks in 2000 when stock prices fell, but Buy-Writes tended to under perform stocks in the years 1995 - 1998 when the S&P 500 rose by more than 20% per year.

But look at what has happened in the past year – the difference in performance between holding the stocks and doing covered calls has widened to it largest differential in years.  Simply put, this is the best time in years to be doing covered calls!