The performance of alternative futures buy-write strategies

Authors

  • Sanry Y.S. Che,

    1. Department of Finance and Decision Sciences, Hong Kong Baptist University, Hong Kong, China
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  • Joseph K.W. Fung

    Corresponding author
    1. Department of Finance and Decision Sciences, Hong Kong Baptist University, Hong Kong, China
    2. Hong Kong Institute for Monetary Research, Hong Kong, China
    • Hong Kong Institute for Monetary Research, Hong Kong, China
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  • This research was supported by a faculty research grant (FRG1/09-10/035) from the Hong Kong Baptist University. We acknowledge with thanks help received from the Hong Kong Exchanges and Clearing Ltd. in providing the data. The authors thank Bill Fung (the discussant) and participants at the 21st Asia Pacific Futures Research Symposium, particularly Bob Webb (the editor) for constructive comments. We want to thank Douglas Chan of eBrokers Systems Ltd., Amy Cheung of Quantsmile Ltd., and Kevin Cheng of T G Securities Ltd. for many helpful suggestions. We are especially grateful to Paul Draper for generously helping cast the study in its current form. We are of course responsible for any omissions and errors in this study. The views expressed in this study are those of the authors, and do not necessarily reflect those of the Hong Kong Institute for Monetary Research, its Council of Advisors, or the Board of Directors.

Abstract

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. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark

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