SPX BuyWrite Strategies – Should I Do A-T-M or O-T-M?

Over the past five years I have delivered more than 100 presentations to financial professionals worldwide on the subject of managing risk-adjusted returns and income with buywrite strategies and buywrite indexes. One of the most frequent questions I receive regards the strike price to use with a buy-write strategy – should I do an at-the-money (A-T-M) or out-of-the-money (O-T-M) buywrite?

A short blog cannot provide a completely comprehensive answer to this question, but here are two indexes and two papers that can help begin to address the question —

CBOE S&P 500 BuyWrite Index (BXM) www.cboe.com/BXM
CBOE S&P 500 2% OTM BuyWrite Index (BXY) www.cboe.com/BXY
Paper by Asset Consulting Group. An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns (January 2012) at www.cboe.com/benchmarks

Paper by Russell Investments. Capturing the Volatility Premium through Call Overwriting. (July 2012) at www.cboe.com/benchmarks
The BXM Index writes one-month S&P 500® (SPX) that are close to A-T-M. The BXM has taken in options premium of about 1.8 % per month, much more than the BXY index. The BXM premiums can provide a nice “cushion” in times when the S&P 500 is flat or declining. However, in times when the S&P 500 is rising, the BXY can outperform the BXM Index, because the BXY Index can participate in many of the upside moves of the S&P 500.