A Disciplined Option Writing Strategy Outperforms a Passive Dow 30 Total Return Index

We have tested a simple option strategy of writing cash collaterized puts and covered calls based on data provided by the IVY Option Metrics Database. This database contains the actual put and call prices from December 31, 1995 to December 31 2010 used in this study. Our base case period for our option strategy (December 31, 1999 to December 31, 2010) has resulted in annualized returns ranging from 5.08% to 5.88% depending upon which P/E multiple cut off we used in our model. Comparatively, the DJIA delivered investors a total return of only 2.41%. Furthermore, our strategy, depending on the P/E cut-off, produced a standard deviation ranging from 4.06% to 5.99% versus the DJIA which had a considerably higher standard deviation of 15.77% for the same period measured. Our results beg the question: on a risk adjusted basis is writing of puts and calls a better strategy than simply investing in a passive index such as the Dow 30 index? The portfolio started with a notional $225,000 investment so as to compare it to a passive index investing strategy. The advantage of a simple, non-levered options writing strategy are significant as it handily outperforms a non-options passive index approach when measured on a risk adjusted basis