Now I know why the buy-write strategy gets such a bad wrap – idiots are running them.
Take a look at 2 years of data.
It’s generally expected to underperperform in a low IV and/or strong bull market, but what were they doing during April and October of 2005?
If you’re running a buy-write, and the fund underperforms the underlying in a bear cycle…just put down the derivatives, before you hurt yourself.
To this “analysis”, I have two things to say:
1. If a buy-write is susceptible to consistently underperform, it does not do so on a risk-adjusted basis, otherwise there exists an arbitrage opportunity and/or an easy way to outperform…by taking the opposite bets. Heir go, vis-a-vie…
2. 2009 compared to 2005, will be very different, and 2013 will be even more so; the market will have more participants, smaller spreads, and higher effeciency. Any bid for a contract will continue to price in future volatility. That is, IV will approach the volatility that comes to fruition, as the markets get more effecient.
So…my hypothesis from #1 & #2, for any contract sold, will be done so, at a continually ever more “fair” price…going forward.
I put my Sony in charge of an IB account today. The algorithm I’m running is a less intense version of what I built and started running in the middle of the summer of ‘08. That one used leverage, up to 4x. That was, a big mistake going into October. It cost me, a pretty penny. This new one, uses what I call negligible leverage + a statistical probability model + a dynamic strike price selection + less active trading. It got long, SPY at 90.24 and wrote $99 Februaries.
Tags: Buy-Write