Generating Yield and Positive Returns in 2013 with Index Options

In 2013 many investors are searching for higher yields and positive returns for yield-oriented investments.  In light of the fact that many interest rates are so low, and some bond-related investments are struggling to generate positive returns, many investors are looking to strategies such as the selling of index options with the goal of generating strong yields and positive returns in 2013.

YIELDS ON TRADITIONAL INVESTMENTS.  Recent consumer money rates were 0.44% for the annual yield on money market funds, and 1.25% for the annual yield on a 5-year CD, according to the Wall Street Journal.  Yield on 10-Year US Treasury notes was 15.8% in Sept. 1981, 1.67% in April 2013, and 2.7% this week.  Dividend yield on the S&P 500 Index fell from 6.2% in June 1982, to 2.07% in June 2013 (See FIGURE 1 below).

YIELDS WITH BUY-WRITE STRATEGY USING INDEX OPTIONS.   The gross premiums generated on Friday, August 16, were between 1.1% and 1.7% for the BXM, BXD, BXR, and BXN indexes. (FIGURE 2). The CBOE S&P 500 BuyWrite Index (BXM) generated gross premiums that have averaged 1.8% per month (FIGURE 3) www.cboe.com/buywrite

PERFORMANCE IN 2013.   In the first 7 months of 2013, the CBOE S&P 500 2% OTM BuyWrite Index (BXY) rose 10%, and the Citigroup 30-Year Treasury Index fell 12%. See FIGURE 4.

BOND ETFs IN RECENT MONTHS.   Some bond ETFs fell in recent months (with rising interest rates); see charts at www.cboe.com/InterestRateETF and also see FIGURE 5 below for a price chart of the TLT ETF.

11Yields July 201311Table Benchmark August13BXM gross premiums Aug14Indexes 7 months15TLT