A combination of active buy-write strategies

Abstract

The purpose of this study is to examine active buy-write strategies and whether a dynamic strike price strategy, a volatility risk premium estimation utilizing strategy and a combination of those active strategies can improve the performance of a vanilla buy-write strategy. Buy-write strategy’s popularity among investors and an increasing amount of strategy indices and exchange-traded funds are the motivation for this thesis.

The buy-write strategy is an investment strategy that includes having a long position on a stock and a short position on a call option on the stock. A short call option obligates its holder to sell the underlying stock at a predetermined strike price at a predetermined time. As the buy-write strategy is entered, the investor creates instantly a positive cash-flow from selling (shorting) the call option but also caps the return of the stock, since if the stock price rises above the strike price the stock has to be sold to the holder of the other end of the option contract. The dynamic strategy tries to improve the vanilla buy-write strategy by using the exercise probability of the option as the criteria which options to sell. The volatility risk premium strategy adds another criterion. It estimates whether the option’s price is artificially high or not. These concepts and theories are explained more thoroughly in theory and methodology sections of this study.

The combine strategy uses both of the aforementioned criteria to construct an active buy-write strategy. The combine strategy is able to improve the performance of the vanilla buy-write strategy. Also, the dynamic and volatility risk premium strategies alone are able to improve the performance. These and some other results and findings are presented and discussed in detail in the last two sections before references.