http://dx.doi.org/10.1002/fut.20535">
 

Document Type

Journal Article

Department/Unit

Department of Finance & Decision Sciences

Title

The performance of alternative futures buy-write strategies

Language

English

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.

Publication Date

2011

Source Publication Title

Journal of Futures Markets

Volume

31

Issue

12

Start Page

1202

End Page

1227

Publisher

Wiley

ISSN (print)

02707314

ISSN (electronic)

10969934

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