Momentum and Covered Calls Almost Everywhere

This article examines times series momentum and covered call strategies through conventional representations across ten asset classes. The performance of the two strategies generally outperform static buy and hold investments and are classified as positive and negative autocorrelation factors. The tactical overlay of time series momentum and covered call strategies onto asset classes are considered asset transformations. The two transformed replacements of the underlying asset are incorporated into well-established risk-based allocation heuristics, such as maximum diversification and equal risk contribution. The resulting portfolios show enhanced risk-adjusted performance compared with corresponding buy and hold investments or individual strategy portfolios. The authors designate this global tactical asset allocation framework as autocorrelation factor allocation (ACFA).

Are covered calls the right option for Australian investors?

Purpose The purpose of this paper is to examine whether superior risk-adjusted returns can be generated using monthly covered call option strategies in large capitalized Australian equity portfolios and across varying market volatility conditions. Design/methodology/approach The authors construct monthly in-the-money (ITM) and out-of-the-money (OTM) S&P/ASX 20 covered call portfolios from 2010 to 2015 and use standard and alternative performance measures. An assessment of variable levels of market volatility on risk-adjusted return performance is also carried out using the spread between implied and realized volatility indexes. Findings The results of this paper show that covered call writing produces similar nominal returns at lower risk when compared against the standalone buy-and-hold portfolio. Both standard and alternative performance measures (with the exception of the upside potential ratio) demonstrate that covered call portfolios produce superior risk-adjusted returns, particularly when written deeper OTM. The 36-month rolling regressions also reveal that deeper OTM portfolios deliver greater risk-adjusted returns in the majority of the sub-periods investigated. This paper also establishes that volatility spread variation may be a driver of performance for covered call writing in Australia. Originality/value The authors suggest that deeper OTM covered call strategies based on large capitalized portfolios create value for investors/fund managers in the Australian stock market and can be executed in volatile market conditions. Such strategies are particularly useful for those seeking market neutral asset allocation and less risk exposure in volatile market environments.

Performance of Option Based Strategy Benchmark Index

This paper develops “Strategy Benchmark Index (SBI)” using KOSPI200 options data from January 2004 to March 2017, and then investigates their performances. The SBIs were constructed in the same way as those published daily by CBOE. To effectively analyze the performance of these SBIs, we classified them into four types : (1) Return enhancement SBIs (six indices), (2) Volatility trading SBIs (two indices), (3) Directional trading SBIs (two indices) and (4) Other SBIs (two indices). The return enchancement SBIs include bechmark indices tracking the performance of various covered call strategies and put writing strategies, which are generally used to increase investment returns. The volatility trading SBIs include benchmark indices tracking the performance of well-known volatility trading strategies such as butterfly spread and condor. Benchmark indices tracking the performance of various types of zero-cost collar strategies are classified into the directional trading SBIs. Our empirical results are as follows. First, the risk-adjusted performances of nine SBIs of the total twelve SBIs constructed from KOSPI200 index options has been shown to be great. Second, from a portfolio perspective, some SBIs can be helpful to improve the portfolio performance of CRRA (Constant Relative Risk Aversion) investors. These results imply that passive investment strategies with KOSPI200 index options can provide additional benefits that both equities and bonds do not provide. Third, even when we use the traditional mean-variance framework other than expected utility theory to verify the economic benefit of the SBIs, our empirical results are found to be still valid. In conclusion, our results suggest that some passive investment strategies using KOSPI200 index options would be beneficial to long term investors.

A Study on Retail Structured Product Market and Financial Regulation in Korea

This study looks at the characteristics and current status of retail structured product market of Korea and tries to explain, in particular, issues related to issue price, cost of hedging, and overpricing. We also analyzed the perspective of the government and the related regulatory policies. We examined various performance measures for portfolios composed of the KOSPI200 Covered Call Index and other assets in order to change the viewpoint of the authorities that the trading of structured products, such as ELS (equity-linked securities) and DLS (debt-linked securities), is in fact not a zero-sum game between the issuers and investors. The empirical results show that the KOSPI200 Covered Call Index has a superior performance compared to the KOSPI200 Index and the others. In addition, from the perspective of certainty equivalent excess returns, the KOSPI200 Covered Call Index also displays the possibility of improving the utility level of risk-averse retail investors. However, it is difficult in reality for individual investors to construct efficient portfolios that employ covered call strategies using options. Hence, individual investors can form optimal portfolios that benefit indirectly from such covered call strategies via investment in financial derivative products issued by securities firms that are able to more easily utilize investment strategies that incorporate options to form optimum portfolios. This means that both the issuer and investor can profit from these financial derivative products and, therefore, it is not a zero-sum game.