The performance of alternative futures buy-write strategies

This study compares the performance of a conventional buy-write (or covered call writing) and a dynamic buy-write strategy. The conventional strategy generally enhances portfolio returns in low volatility conditions but underperforms the underlying cash asset in sharply rising markets. The dynamic strategy adjusts the moneyness of the option according to market conditions. The study extends Hill, J. M., Balasubramanian, V., Gregory, K., and Tierens, I. (2006) and tests how and to what extent market volatility and market direction affect the performance of these two strategies. The study finds that both strategies offer significant positive α, higher returns and lower standard deviations than the market. Consistent with prior research, the abnormal returns of the buy-write strategies can be attributed to a volatility premium embedded in the options prices. The buy-write returns from the Hong Kong market appear to be lower than those found in the U.S. and U.K. markets. The conventional buy-write outperforms the dynamic strategy in both high and low volatility environments, and in sharply falling markets. However, by targeting exercise probability, the dynamic strategy provides a greater upside in sharply rising markets.