The Performance of Options-Based Investment Strategies:
Evidence for Individual Stocks During 2003–2013
Using data from January, 2003, through August, 2013, we examine the relative performance of options-based investment strategies versus a buy-and-hold strategy in the underlying stock. Specifically, using ten stocks widely held in 401(k) plans, we examine monthly returns from five strategies that include a long stock position as one component: long stock, covered call, protective put, collar, and covered combination. To compare performance we use four standard performance measures: Sharpe ratio, Jensen’s alpha, Treynor ratio, and Sortino ratio. Ignoring early exercise for simplicity, we find that the covered combination and covered call strategies generally outperform the long stock strategy, which in turn generally outperforms the collar and protective put strategies regardless of the performance measure considered. These results hold for the entire period 2003–2013 and both sub-periods 2003–2007 and 2008–2013. The findings suggest that options-based strategies can be useful in improving the risk-return characteristics of a long equity portfolio. Inferences regarding superior or inferior performance are problematic, however, as the findings reflect the Leland (1999) critique of standard CAPM-based performance measures applied to option strategies.
Evidence (charts based on data that goes back to 1986) that buy-write strategies (BXM) and put-writing strategies (PUT) outperform collar strategies (CLL) and simple buy and hold is widely distributed and well understood by experienced option traders. Those studies are based on index options and the study quoted above concentrates on individual stocks. But the conclusions are familiar.