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BookingAlpha Option Trading Advisory

Wednesday, January 16, 2019

Out of the Money Covered Calls (BXY) – outperforming CBOE’s BXM Buy Write Index

This article appeared first on

With the introduction of the BXM and PUT indexes by the CBOE in 2003, it became apparent to many investors that selling Options around equity positions could indeed become a smarter way to invest for better returns in the long run and less volatility. Based on the interest provoked by the launch of these indexes, it was only a matter of time before investors started inquiring about other potential approaches to options selling.

So, in 2006 the CBOE came up with BXY, which is another Covered Call selling strategy on the S&P500, similar to BXM already discussed here.

The difference is that, BXY uses Out of the Money Call options with a strike price that is 2% higher than the current SPX Index price. BXM, on the other hand, uses the nearest At-The-Money Call option every month (or first one of the money if no exact ATM strike is found).

This is an important distinction because on a monthly basis, BXY accumulates less premiums from the Call options sold as they are worth less credit than “near at the money options” used by BXM. However, in exchange for this, BXY expects to participate a little bit more in market rallies without capping the capital gains as quickly as BXM does.

Every month, BXY has a 2% upside potential in equity appreciation before the strike price of the Covered Call option sold is hit. It is not hard to conclude that during strong years, BXY will outperform BXM. And during negative years, BXM should out-perform BXY as both lose money on the underlying index position but BXY is able to mitigate the losses better, thanks to the larger credits obtained from selling ATM Options.

In recent years of a strong bull market BXY has easily outperformed BXM.

Going back to June 1, 1988 (date where BXY was initialized in the back-test at an initial price of 100), and going to March 2006 (when BXY was officially created by the CBOE), the performance of BXY is superior to that of BXM, although with a little more volatility:
Taken from this CBOE link

Selling Covered Call options tends to outperform the index in the long run. Choosing 2% Out of the Money options results in even better performance than if you use close to At-The-Money options, although the latter approach offers a smaller volatility.

For more details about the BXY methodology, consult this paper published by the CBOE.

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