The Supreme Myth of the Risk of Options Debunked, Part 3

Published on: Aug 12 2015 by John Critchley

The Supreme Myth of the Risk of Options Debunked, Part 3

 

By:  John J. Critchley, Jr    Option Principal / Senior Options Specialist

 

Another academic study and more strong evidence of the effectiveness of options in enhancing or outperforming the risk/reward return of long equity portfolios.  This time, a pair of Notre Dame Business school professors examined the risk-return characteristics of a long equity buy-and-hold strategy versus those of options-based investment strategiesusing data from January, 2003, through August, 2013.

 

The study found that:

  • From best to worst, the strategies rank as follows:
    • Covered combination- long stock, short put and short call
    • Covered call
    • Long equity
    • Collar- long stock , long put , short call
    • Protective put- long stock, long put
  • Long equity generally outperforms the collar and protective put.
  • The covered call generally outperforms long equity.
  • The covered combination generally outperforms long equity.

 

In particular, they examined 10 stocks widely held over the period 2003–2013. The results suggest that options-based strategies can be useful in improving the risk-return characteristics of a long equity portfolio. Specifically, the covered combination and covered call strategies consistently outperform the corresponding long stock strategy. This result holds regardless of the measure used to gauge performance or whether one uses the first half, second half, or entire time period.

 

This is a very interesting and fair study.   Worth a read.   The Performance of Options-Based Investment Strategies: Evidence for Individual Stocks During 2003–2013 http://www.optionseducation.org/content/dam/oic/documents/literature/files/perf-options-strategies.pdf

 

I should point out that this unbiased study does state that transactions costs and early exercise considerations are hard to gauge and may alter the results.  Nevertheless, I find myself asking when will the ‘option naysayers’ finally throw in the towel.  Maybe never, but I do know that I sleep confidently at night strong in my belief that options if used properly are an excellent way to enhance any investors portfolio.  

 

Embrace Options, do not fear them.

 

Stay tuned………

 

 

Disclaimer


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