Those Buy Writes Are Rocking Too

bxmspy Those Buy Writes Are Rocking Too

One of the benefits of using investing in a buy-write fund instead of an index fund is reduced volatility. Always find that ironic that a call writing strategy reduces volatility, but alas it does as it caps upside and gives you a little premium on the downside.

Of course one of the downsides is that volatiltiy goes up when the market declines. Sometimes (cough) explosively so.

So yada yada yada, here’s the CBOE Buy-write index (BXM) vs. SPY. And while it has outperformed in the last week, it’s not exactly cosmic. It’s no mystery why of course. BXM employs a fixed (hypothetical) strategy. Each expiration, it *buys* SPX and shorts the nearest to money 1 month call. And that call probably carried about a 14-15 volatility. In other words, not much cushion to offset this drop in any meaningful way. Not to mention the call itself probably still carries some premium given the VIX spike.

Common sense says a lower index and a soaring volatility makes a good time to buy-write (or just naked short puts). But in practice, it often just outperforms by losing modestly less.


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