Academic studies support the use of an S&P 500 "buy-write" strategy. Here’s how the process works:
1. You invest in an S&P 500 index mutual fund or exchange-traded fund (ETF). In essence, you’re buying the stocks in that index.
2. You sell "covered calls" against the index. The buyer of these options can buy the index from you at given price. As an options seller, you get cash upfront but relinquish the chance of significant gains.
Research indicates that call options are usually overpriced. Thus, sellers of calls generally do better than buyers of calls. Those who sell them tend to make more money than those who buy.
One study found that a buy-write strategy would have generated a 13 percent profit over the past 10 years. Investors who simply bought and held the S&P 500 would have lost 2 percent. Moreover, the buy-write strategy has not been as volatile as a buy-and-hold approach.
Implementing a buy-write strategy on your own is not easy. However, you can buy ETFs and exchange-traded notes (ETNs) that replicate the strategy for investors: They include iPath CBOE S&P 500 BuyWrite Index (BWV), IQ Investor Advisors’ S&P 500 Covered Call Fund (BEP), and PowerShares’ S&P 500 BuyWrite Portfolio (PBP).
