[FIRE'd@51]

Quote:

Originally Posted by ERD50 Someone else could probably chime in and tell us if a strategy of a blend of bonds and S&P would give similar results? Offhand, it seems that you would need a lot of bonds to drop the standard dev that much lower, and in turn, that would lower your total return?

This is true. In another thread we talked about the fact that a covered call had the same return pattern as a naked put. So, another way to implement this would be with a MM fund and short 1-month puts on the S&P 500 (I would use SPX's since they are cash-settled). Since the BXM is rolling one-month covered calls, one would want to hold short-term paper which matches the horizon of the buy-write.

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Originally Posted by ERD50 But it does underperform in rapidly rising markets.

Very true, and so far this year BXM is up 3.3%, while the S&P has had a total return of about 8.3%



I think that it is interesting to note that, according to the backtest, the reason that BXM outperformed the S&P 500 was due to the fact that the average implied volatility of the calls sold was higher (16.5%) than the subsequent realized volatility of the S&P 500 (14.9%). This difference accounts for an extra 0.2% of extra call premium per month (about 2.4% per year). IOW, had the implied volatility of the calls sold equaled the realized volatility, the BXM would have underperformed the S&P 500 by more than 2% per year. Of course, the expected return on a buy-write is less than that on the underlying stock.

Buy-Write = Stock - Call

Exp Rtn [Buy-Write] = Exp Rtn [Stock] - Exp Rtn [Call]

Since the expected return on the call is positive, the expected return on the buy-write is less than that on the stock.