WHAT is Option Writing?

Many investors and advisers may be skeptical about options strategies, citing their use of leverage, their complexity and the propensity for most options to expire worthless, not to mention the costs. An equity index put/call write strategy, however, is unlike other options strategies in that puts/calls are written on indexes, not individual stocks. There is no leverage because the portfolio is fully collateralized.
  • Covered call writing is either the simultaneous purchase of index ETF shares (e.g., SPY) and the sale of a call option, or the sale of a call option covered by underlying shares currently held by an investor. ​
  • Put writes work by first investing the assets in a collateral portfolio, such as U.S. Treasuries, and then writing (selling) puts to take in option premiums (as income) from investors who are willing to pay to mitigate short-term losses.

WHY CAN Option Writing YIELD BETTER THAN 4%?

  • A covered call strategy generates income on a stock you own. It involves owning a stock and selling call options on the same stock. In doing so, you would forgo potential profits on the stock if the stock price rose above the strike price of the sold option and the calls were exercised. Here a stock can be an index ETF too for better diversification.
  • Put writing generates income because the writer of the put option contract receives the premium while the buyer obtains the option rights. If managed properly, a put-writing strategy can generate profits for the seller, as long as he is not forced to buy shares of the underlying stock or index.
According to the research done by Wilshire Associates for Cboe, ​option overlay strategies have an attractive risk/return profile over time as shown below.

HOW TO INVEST IN Option Writing BY YOURSELF?

Generally, one call/put option is written for every 100 shares of index ETF owned (e.g., SPY). The writer receives cash as income for selling the call/put but will be obligated to sell the ETF at the call's strike price or buy the ETF at the put's strike price if assigned.
  • Option writing strategy seeks to smooth out returns by pursuing equity-like returns with lower volatility than broad equity markets over the long term.
  • It focuses on liquid exchange-traded options, offers transparency in implementation and can be used as an income generating strategy.
  • Over the past 25 years, the CBOE S&P 500 PutWrite Index (PUT) has outperformed the S&P 500 index, with lower volatility and better risk-adjusted returns.
Option writing strategy has been incorporated into ETF income portfolios to generate enhanced high-income with even better risk/return profiles. Here are two actual hybrid option-ETF portfolios with left using put-writing and right using covered call to achieve high-income lower-risk performance over the given period .
  • Optionable Index Choices
  • Option-Writing ETFs
  • Option-ETF Hybrid Portfolios
CBOE Equity Option Strategies - Covered Calls
CBOE Equity Option Strategies - Cash-Secured Puts
Historical Performance of Put-Writing Strategies

Pros:

  • The covered call strategy is one of the most basic and widely used that combines the flexibility of listed equity options with the benefits of stock ownership. It works well for cash, margin, and Keogh accounts or IRAs.
  • The covered call generates income from the premium received from the call contract's sale that can supplement any dividend income paid to eligible underlying stockholders.

Cons:

  • Options strategies may not be suitable for everyone. In a trendy market condition, it could result in limited downside stock price protection and/or limited participation on the upside. ​