Article2002

Return and Risk of CBOE Buy Write Monthly Index

114 citations0/0 files storedThe Journal of Derivatives

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Financial Markets and Investment Strategies Stochastic processes and financial applications Financial Risk and Volatility Modeling

Abstract

Ederington and Guan’s article calls into question the informational efficiency of option pricing in the real world, by showing that easily constructed positions earn higher returns than they should. Whaley’s article adds evidence of a somewhat different kind to this conclusion. The Chicago Board Options Exchange has recently created an index to measure the returns to a basic covered call strategy that is long the S&P 500 index portfolio (SPX) and short an (approximately) at-the-money one-month SPX call option. In this article, Whaley describes the new index and then uses it to examine the returns to a basic covered call strategy from 1988 to 2001. Measuring the risk of a covered call presents some issues, because it is highly non-normal. Dealing with these, Whaley shows that under several standard measures of investment performance, the covered call strategy has been unusually successful, earning almost as much as the S&P index, with substantially lower risk.

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1973The Pricing of Options and Corporate Liabilities 1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1973Theory of Rational Option Pricing 1965The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets 2005Theory of rational option pricing 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1952Portfolio Selection 1968THE PERFORMANCE OF MUTUAL FUNDS IN THE PERIOD 1945–1964

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