Covered calls uncovered

• Autores: Roni Israelov, Lars N. Nielsen
• Localización: Financial analysts journal, ISSN-e 0015-198X, Vol. 71, Nº. 6, 2015, págs. 44-57
• Idioma: inglés
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• Resumen

  • Typical covered call strategies collect the equity and volatility risk premiums but also embed exposure to a naive equity reversal strategy that is uncompensated. This article presents a novel risk and performance attribution methodology that deconstructs the strategy into these three exposures. Historically, the equity exposure contributed most of the risk and return. The short volatility exposure realized a Sharpe ratio of nearly 1.0 but contributed only 10% of the risk. The equity reversal exposure contributed approximately 25% of the risk but provided little return in exchange. The authors propose a risk-managed covered call strategy that eliminates the uncompensated equity reversal exposure. This modified covered call strategy has a superior Sharpe ratio, reduced volatility, and reduced downside equity beta