OIC: Options Beats Long-Only Portfolios

Terry Flanagan

The Options Industry Council has released a new academic research study, “The Performance of Options-Based Investment Strategies: Evidence for Individual Stocks During 2003-2013,” conducted by Professors Michael L. Hemler, University of Notre Dame’s Mendoza College of Business,, and Thomas W. Miller, Jr., Mississippi State University.

The study, which was supported by OIC, found that some options-based portfolio strategies seemingly outperform long equity portfolios over time. The authors presented the results of the study at the 2015 Financial Advisors Forum held in conjunction with the 33rd Annual Options Industry Conference taking place this week in Miami Beach, Florida.

This research compares the performance of several different options strategies using equity options. A distinctive feature of this study is its exploration of the covered combination strategy and early exercise. The study examined the relative performance of five different investment strategies, four options strategies and a long equity strategy, for individual stocks widely held in 401(k) plans from 2003 through 2013.

The options strategies used in the study include the covered call, protective put, collar and covered combination. Of these five strategies, the covered combination, which is a multi-leg options strategy that combines the covered call and the cash-secured put, outperformed the others using four standard risk-adjusted performance measures: Sharpe ratio, Jensen’s alpha, Treynor ratio, and Sortino ratio.

The results suggest that options-based strategies can be useful in improving the risk-return characteristics of a long equity portfolio. Specifically, the covered combination and covered call strategies consistently outperform the corresponding long stock strategy. This result holds regardless of the measure used to gauge performance or whether one uses the first half, second half, or entire time period.

Comparing relative performance via standard measures such as those proposed by Sharpe, Jensen, Treynor, and Sortino, might lead one to conclude that the covered combination and covered call strategies are attractive alternatives to the standard long stock position. However, performance evaluation is not that simplistic, according to the study. One cannot ignore the growing literature documenting problems associated with the application of such measures to option strategies. Moreover, early exercise is another issue that must be considered more closely to judge performance more accurately.

“We applaud the work of Professors Hemler and Miller to create greater awareness and understanding of how specific options strategies can be used to enhance investment returns as well as reduce risk in up, down, and flat markets,” said Scot Warren, OCC executive vice president of business development at OIC, in a statement. “OIC is proud to support this study and will use the research to further our efforts to educate financial advisors and investors about the benefits of options.”

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