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Option-Writing Strategies in a Low-Volatility Framework

Donald X. He, Jason C. Hsu and Neil Rue
The Journal of Investing Fall 2015, 24 (3) 116-128; DOI: https://doi.org/10.3905/joi.2015.24.3.116
Donald X. He
is a portfolio risk analyst for Allianz Global Investors in San Diego, CA.
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  • For correspondence: donald.he@allianzgi.com
Jason C. Hsu
is a faculty member at UCLA Anderson School of Management and cofounder and vice chairman of Research Affiliates LLC in Newport Beach, CA.
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  • For correspondence: hsu@rallc.com
Neil Rue
is managing director at Pension Consulting Alliance in Portland, OR.
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  • For correspondence: neilrue@pensionconsulting.com
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Abstract

Covered call buy–write strategies have risk–return profiles that are similar to those of low volatility equity portfolios, and both approaches appear to extract return premium from investors with leverage constraints and a preference for lottery-like bets. We analyzed simulated long-term (1996–2012) returns of buy–write strategies using one-month and three-month call options on the S&P 500 Index, across a range of strike levels, with monthly and quarterly rebalancing. We found that monthly rebalancing of three-month options generated the most favorable results. We also found that the improvement in risk-adjusted performance achieved with buy–write strategies comes from the skewness premium earned for accepting exposure to the tail risk of substantial losses. In addition, we determined that, due to differences in factor loadings, a buy–write strategy would likely serve well to diversify the risks of a low volatility equity portfolio.

TOPICS: Options, analysis of individual factors/risk premia, performance measurement

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Option-Writing Strategies in a Low-Volatility Framework
Donald X. He, Jason C. Hsu, Neil Rue
The Journal of Investing Aug 2015, 24 (3) 116-128; DOI: 10.3905/joi.2015.24.3.116

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Option-Writing Strategies in a Low-Volatility Framework
Donald X. He, Jason C. Hsu, Neil Rue
The Journal of Investing Aug 2015, 24 (3) 116-128; DOI: 10.3905/joi.2015.24.3.116
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