The term buy-write is used to describe an investment strategy in which the investor "buys" stocks and "writes" call options against the stock position. The writing of the call option provides extra income for an investor who is willing to forego some upside potential.
Investors have used exchange-listed options to engage in buy-write strategies since the since the 1970s, and descriptive articles were published in the [http://www.iijournals.com/jpm The Journal of Portfolio Management] in 1978 by Henry Pounds and in 1980 by Yates and Kopprasch (see references section below). However, prior to 2002 there was no major benchmark for buy-write strategies. In conjunction with a [http://www.iijournals.com/JOD/ 2002 study] by Professor Robert Whaley of Duke University, the
Chicago Board Options Exchangeintroduced the CBOE S&P 500 BuyWrite Index in 2002. The BXM Index is designed to show the hypothetical performance of a strategy in which an investor buys a portfolio of the S&P 500 stocks, and also sells (or writes) covered calloptions on the S&P 500Index.
Investors have used covered call strategies for more than three decades. As noted in a magazine article “Buy Writing Makes Comeback as Way to Hedge Risk.” "Pensions & Investments", (May 16, 2005), two developments have enhanced the interest in covered call strategies in recent years: (1) in 2002 the
Chicago Board Options Exchangeintroduced the first major benchmark index for covered call strategies, the [http://www.cboe.com/micro/bxm/introduction.aspx CBOE S&P 500 BuyWrite Index (ticker BXM)] , and (2) in 2004 the [http://www.ibbotson.com/ Ibbotson Associates] consulting firm published [http://www.ibbotson.com/content/kc_published_research_search.asp?catalog=Article&category=Knowledge%20Center%20Published%20Research&ib_id=ARTC91520041 a case study on buy-write strategies] . In 2006 [http://www.callan.com/about/ Callan Associates] published [http://www.cboe.com/micro/bxm/introduction.aspx A Review of the CBOE S&P 500 BuyWrite Index.]
The BXM Index won the [http://press.arrivenet.com/business/article.php/533503.html Most Innovative Benchmark Index award] at the 2004 Super Bowl of Indexing Conference.
More than forty new buy-write investment products have been introduced since mid-2004 (see Samples section below).
Benchmark Indexes for BuyWrite Strategies
CBOE S&P 500 BuyWrite Index (BXM)
CBOE DJIA BuyWrite Index (BXD)
*CBOE Russell 2000 BuyWrite Index (BXR)
*CBOE NASDAQ-100 BuyWrite Index (BXN)
* [http://www.cboe.com/micro/bxy/introduction.aspx CBOE S&P 500 2% OTM BuyWrite Index (BXY)]
*S&P/ASX Buy-Write Index (Australia) (XBW)
amples of Buy-write Investment Products
* [http://www.invescopowershares.com/products/overview.aspx?ticker=pbp PowerShares S&P 500 BuyWrite Portfolio (Ticker PBP)]
* [http://www.ipathetn.com/buywrite-etn-overview.jsp iPath CBOE S&P 500 BuyWrite Index ETN (ticker BWV)]
* [http://www.amex.com/?href=/atamex/news/press/sn_PBN_092705.htm Citigroup Funding, Inc. PISTONS Linked to the CBOE S&P 500 BuyWrite Index]
* [http://www.amex.com/?href=/atamex/news/press/sn_BXU_122905.htm Merrill Lynch's 8% Monthly Income Strategic Return Notes, Linked to the CBOE S&P 500 BuyWrite Index (Ticker BXU)]
* [http://finance.yahoo.com/q?s=bxa Merrill Lynch 8% Strategic Return Notes linked to the CBOE S&P 500 BuyWrite Index (Ticker BXA)]
* [http://www.amex.com/?href=/atamex/news/press/sn_MBS_112304.htm Morgan Stanley Strategic Total Return Securities (STARS) linked to the BXM Index (Ticker MBS)]
* [http://www.amex.com/?href=/atamex/news/press/sn_BWN_122305.htm Morgan Stanley 8% Targeted STARS based on CBOE S&P 500 BuyWrite Index (Ticker BWN)]
* [http://www.iqinvestmentadvisors.com/fundsOverview.asp?symbol=BEP IQ Investment Advisors S&P 500 Covered Call Fund Inc. (Ticker BEP)]
* [http://www.eatonvance.com/mutual_funds/fund_info_closed.asp?fund=ETB&h=3 Eaton Vance Tax-Managed Buy-Write Income Fund (Ticker ETB)]
References - News Clips and Magazine Articles
*Blake, R. "Investors Are Dusting Off an Old Strategy, Options Overlay; When It Works, It Offers Both Yield Enhancement and Risk Management." "Institutional Investor", (Sept. 2002), pp. 173 - 174.
* [http://www.cboe.com/micro/bxm/introduction.aspx Callan Associates. A Review of the CBOE S&P 500 BuyWrite Index (BXM). (October 2006).]
*Crawford, Gregory. “Buy Writing Makes Comeback as Way to Hedge Risk.” "Pensions & Investments", (May 16, 2005).
*Demby, E. R. “Maintaining Speed -- In a Sideways or Falling Market, Writing Covered Call Options Is One Way To Give Your Clients Some Traction.” "Bloomberg Wealth Manager", (February 2005).
*Feldman, Barry and Dhuv Roy. "Passive Options-Based Investment Strategies: The Case of the CBOE S&P 500 BuyWrite Index." [http://www.iijournals.com/JOI/default.asp "The Journal of Investing"] , (Summer 2005).
*Ferry, John. "An Array of Options - A Buy-write Strategy Can Add Some Octane to Portfolios When the Markets Lack Direction." "Worth Magazine", (April 2005), pp. 102 - 104.
*Hadi, Mohammed. "Buy-Write Strategy Could Help in Sideways Market." Wall Street Journal. (April 29, 2006) pg. B5.
*Hill, Joanne, Venkatesh Balasubramanian, Krag (Buzz) Gregory, and Ingrid Tierens. "Finding Alpha via Covered Index Writing." Financial Analysts Journal. (Sept.-Oct. 2006). pp. 29-46.
*Keenan, C. “Mass Appeal It's Still a Niche Market, But More Assets Are Flowing Into Mutual Funds That Use Hedge Fund Techniques.” "Institutional Investor", ( July 2004).
*Moran, Matthew. “Risk-adjusted Performance for Derivatives-based Indexes – Tools to Help Stabilize Returns.” "The Journal of Indexes". (Fourth Quarter, 2002) pp. 34 – 40.
*Pounds, Henry M. “Covered Call Option Writing: Strategies and Results.” [http://www.iijournals.com/jpm The Journal of Portfolio Management] (Winter 1978).
*Roeder, David. "New Funds Try Options to Boost Stock Income." Chicago Sun-Times, (October 10, 2004).
*Schneeweis, Thomas, and Richard Spurgin. "The Benefits of Index Option-Based Strategies for Institutional Portfolios" " [http://www.iijournals.com/JAI/ The Journal of Alternative Investments] ", (Spring 2001), pp. 44 - 52.
* [http://www.sirca.org.au/Papers/2004006.pdf SIRCA. Return and Risk of Buy-Write Strategies using Index Options -- Australian Evidence (February 2004).]
* [http://www.thestreet.com/options/stevensmith/10082536.html Smith, Steven. "Covered Calls Move Closer to the Masses" TheStreet.com (April 2003)]
*Smith, Steven. [http://www.thestreet.com/_tscs/markets/activetraderupdate/10329032.html “Options on Covered Calls.”] RealMoney, (Dec. 20, 2006).
*Tan, Kopin, "Yield Boost -- Firms Market Covered-call Writing to Up Returns." Barron's, (Oct. 25, 2004).
*Tergesen, Anne. [http://www.businessweek.com/magazine/content/01_21/b3733128.htm "Taking Cover with Covered Calls."] "Business Week", (May 21, 2001), pp. 132.
*Wasik, J. “Used Wisely, Options Can Help Dodge Stock Losses.” "Bloomberg News", (May 15, 2005).
*Whaley, Robert. "Risk and Return of the CBOE BuyWrite Monthly Index" " [http://www.iijournals.com/JOD/ The Journal of Derivatives] ", (Winter 2002), pp. 35 - 42.
*Woolley, S. “Squeeze Your Portfolio Harder,” "BusinessWeek", (December 27, 2004).
*Yates, James, and; Robert W. Kopprasch Jr. “Writing Covered Call Options: Profits And Risks” [http://www.iijournals.com/jpm The Journal of Portfolio Management] (Fall 1980).
External Links -- Education and Benchmark Indexes
* [http://www.cboe.com/toolbox Options Toolbox]
* [http://biz.yahoo.com/opt/strategy2.html Yahoo! Covered Calls]
* [http://www.optionetics.com/education/bullish/covered.asp Optionetics Covered Call Education]
* [http://www.cboe.com/Strategies/EquityOptions/CoveredCalls/Part1.aspx Covered Calls Worksheet]
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