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BuyWrite Index Is Victim of Its Own Success


A look at how the BXM has fared since March versus the market.

So with the market in "rally everyday" mode and volatility right near 52-week lows, what better time to compare how the BuyWrite Index (BXM) has fared since March versus the market. (I'm using SPY here as "the market.")

Now on one hand, the market has lifted something like 40% in the last months, so BXM has some rough comps.

But on the other hand, the VIX has lost half its value.

And lo and behold, BXM just couldn't keep up, as it's up a mere 25% or so.

Basically, it's a victim of its own success. The methodology involves owning the index and selling the near-above near-month call each expiration. But if the index keeps rallying, that buy-write will max out long before expiration. This month, for instance, the write strike is something like 1020 in SPX. So any rally this week will leave BXM way behind.

On the flip side, BXM has had the advantage of getting theoretically overpaid for options for a few months now. Realized volatility still lags the implied.

Bottom line is, if a buy-write can hold its own through a gigantic six-month rally, it's a pretty good strategy the vast majority of the time that we don't see such extended moves. And since May, it has in fact held its own.
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