Traders Score With Buy-Write Options Strategy Tuned To U.S. Calm
By Callie Bost
The torpor in U.S. equities is proving a bonanza for traders employing an options tactic designed to capitalize on dead markets.
For the first time since 2011, speculators using the buy-write strategy — selling bullish options while holding the underlying stock to amplify gains — are beating the Standard & Poor?s 500 Index. The Chicago Board Options Exchange S&P 500 BuyWrite Monthly Index has risen 6 percent this year, beating the 1.7 percent gain in the broad-market gauge.
Traders have taken notice. They?ve flocked to the PowerShares S&P 500 BuyWrite Portfolio, an exchange-traded fund tracking the options tactic, and pushed shares outstanding to a record in May. The ETF has climbed 3.5 percent this year.
?A churning market is the buy-write index?s best friend,? said Mark Sebastian, options trader and founder of Option Pit, a Chicago-based education and consulting firm. ?In a market where?s there?s not a lot of large swings or the S&P 500 doesn?t go anywhere on a month-to-month basis, it?s going to outperform.?
U.S. stocks? narrow band has allowed traders to sell both bearish and bullish options without having to exercise them. The S&P 500 has traded in a 90-point range since February, fluctuating between gains and losses as investors digested weakening earnings, turmoil in Greece and China and the withdrawal of Federal Reserve stimulus.
At the same time, the cost of options has increased, allowing buy-writing traders to collect bigger premiums when they sell. The CBOE Volatility Index, a measure of S&P 500 hedging costs, has averaged 15.07 this year, higher than any since 2012. It dropped 14 percent to 13.44 Tuesday.