This article appeared first on enhanced-investing.com(March 20, 2019) ------------------------------------------------------------------------------------------------------
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.
“…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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