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BookingAlpha Option Trading Advisory

Tuesday, March 26, 2019

Comparison of BXM vs PUT indexes

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What is more efficient? Covered Call selling or Cash Secured Put selling? It obviously depends on the stock that is being played, but what we’d like is a “general” answer.

It would seem that the Covered Call strategy should be more advantageous as it allows you to participate in at least a portion of a stock rally until the short strike of the Call option is breached. Whereas with the short Put, the most you can make is simply the credit collected on the Put. However, it is at times of equity exposure where the investor is taking the most risk. The Short Put position can make money month after month with zero equity exposure and this is what makes it shine in the long run.

As per the CBOE’s BXM and PUT Conondrum by Catherine Shalen:
“…the cumulative rate of return of the CBOE S&P 500 PutWrite Index (PUT index) has exceeded the rate of the CBOE S&P 500 BuyWrite Index (BXM index) since June 1986, their common inception date.”

“The difference between the PUT and BXM never ceases to surprise investors. Intuitively, the PUT and BXM should have the same return because their underlying strategies look equivalent. The BXM index

writes an at-the-money call over the S&P 500, while the PUT collateralizes an at-the-money put with Treasury bills. So why don’t they?”

Obviously, the way the markets move will dictate which instrument is likely to out-perform. If the markets are in a perpetually bullish stage, with only minor, scattered declines, BXM has a good chance of being the winner. But extended periods of sideways and downside action make PUT shine.
We are also comparing with At The Money Call selling (BXM). This is a covered call strategy where there is not a lot of participation in the market rallies. Indexes such as BXY or BXMD, which sell Out of the Money Covered Calls will have more participation and therefore better chances to outperform, which we will explore in a future article.

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