The efficiency of the buy-write strategy: Evidence from Australia

Tafadzwa Mugwagwa, Vikash Ramiah, Tony Naughton and Imad Moosa

Journal of International Financial Markets, Institutions and Money, 2012, vol. 22, issue 2, 305-328

Abstract: We examine the performance of the buy-write option strategy (BWS) on the Australian Stock Exchange and analyse whether such an investment opportunity violates the efficient market hypothesis on the basis of its risk and returns. This study investigates the relationship between buy-write portfolios returns and past trading volume and other fundamental financial factors including dividend yield, firm size, book to market ratio, earnings per share (EPS), price earnings ratio and value stocks within these portfolios. We also test the profitability of the buy-write strategy during bull and bear markets. Consistent with the literature, it is observed that BWS offers superior risk adjusted returns for low levels of out-of-moneyness and contrary evidence is observed for deeper out-of-money portfolios. Consistent with a preference for options with a maturity of around 3 months in Australia, this research shows that quarterly rebalancing periods offer better returns for the BWS.

Keywords: Buy-write strategy; Option; Equity; Portfolio performance; Efficient market (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G24 G32 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:22:y:2012:i:2:p:305-328

DOI: 10.1016/j.intfin.2011.10.001

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