Paper
Journal of Derivatives & Hedge Funds (2007) 13, 66–79. doi:10.1057/palgrave.jdhf.1850063
Great in practice, not in theory: An empirical examination of covered call writing
Practical applications
Covered call writing is a common investment approach among individual investors and money managers. Although these investors often argue for the practice on the grounds that income from covered call writing can enhance overall returns during periods when stock prices are languishing, it had not been previously demonstrated that the practice is empirically supported. The practical application of this paper is that it provides an empirical grounding that investors can use when deciding on the merits of a covered call writing investment strategy.
Michael L McIntyre1 and David Jackson2
Correspondence: Michael L. McIntyre, Eric Sprott School of Business, Carleton University, 1125 Colonel By Drive, Ottawa, Ontario, Canada K1S 5B6. Tel: +1 613 520 2600, Fax: +1 613 520 4427, E-mail: mmcintyr@sprott.carleton.ca
1Michael L. McIntyre is Assistant Professor in the Eric Sprott School of Business at Carleton University. Prior to entering academia, he worked as a Chartered Accountant and in corporate banking with a major Canadian bank.
2David Jackson is Assistant Professor in the Eric Sprott School of Business at Carleton University. Prior to entering academia, he worked as an engineer, primarily in instrumentation and developing special purpose computer-based data acquisition and control systems.
Received 4 November 2006; Revised 4 November 2006.
Abstract
We examine the empirical performance of an investment strategy that uses covered call writing to enhance the income from long positions in 27 stocks that are included in the FT-SE 100 Index. Using data for the period January 1994–December 1999 we show that, contrary to theory, in most instances covered call positions generate returns that exceed returns generated by buy-and-hold strategies.
Keywords:
portfolio strategy, derivatives
