Return and Risk of CBOE Buy Write Monthly Index

Abstract

Ederington and Guan’s article calls into question the informational efficiency of option pricing in the real world, by showing that easily constructed positions earn higher returns than they should. Whaley’s article adds evidence of a somewhat different kind to this conclusion. The Chicago Board Options Exchange has recently created an index to measure the returns to a basic covered call strategy that is long the S&P 500 index portfolio (SPX) and short an (approximately) at-the-money one-month SPX call option. In this article, Whaley describes the new index and then uses it to examine the returns to a basic covered call strategy from 1988 to 2001. Measuring the risk of a covered call presents some issues, because it is highly non-normal. Dealing with these, Whaley shows that under several standard measures of investment performance, the covered call strategy has been unusually successful, earning almost as much as the S&P index, with substantially lower risk.