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The performance of covered calls

Author

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  • J. Board
  • C. Sutcliffe
  • E. Patrinos

Abstract

Writing call options against long positions in the underlying equities is the most popular options strategy. Since the variance is an inadequate measure of risk for options strategies, this paper uses a range of dominance criteria and four utility functions to compare the performance of partly and fully covered call strategies with that of the underlying equity portfolio. It is found that the dominance criteria are ineffective in choosing between strategies. However, all four utility functions (representing different combinations of absolute and relative risk aversion) find that the covered call strategy is preferable for the data period studied, supporting the widespread use of this strategy.

Suggested Citation

  • J. Board & C. Sutcliffe & E. Patrinos, 2000. "The performance of covered calls," The European Journal of Finance, Taylor & Francis Journals, vol. 6(1), pages 1-17.
    • Handle: RePEc:taf:eurjfi:v:6:y:2000:i:1:p:1-17
    DOI: 10.1080/135184700336937
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    References listed on IDEAS

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    Cited by:

    1. Mugwagwa, Tafadzwa & Ramiah, Vikash & Naughton, Tony & Moosa, Imad, 2012. "The efficiency of the buy-write strategy: Evidence from Australia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 305-328.
    2. Martina Nardon & Paolo Pianca, 2016. "Covered call writing in a cumulative prospect theory framework," Working Papers 2016:35, Department of Economics, University of Venice "Ca' Foscari".
    3. Mauricio Diaz & Roy H. Kwon, 2019. "Portfolio optimization with covered calls," Journal of Asset Management, Palgrave Macmillan, vol. 20(1), pages 38-53, February.
    4. Wei-Han Liu & Jow-Ran Chang & Guo-Jun Yang, 2024. "An improved criterion for almost marginal conditional stochastic dominance," Review of Quantitative Finance and Accounting, Springer, vol. 62(3), pages 1251-1290, April.
    5. Christian Hertrich, 2013. "Asset Allocation Considerations for Pension Insurance Funds," Springer Books, Springer, edition 127, number 978-3-658-02167-2, December.

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