Returns and Volatilities of ETF Option Strategies

How well do simple option strategies work when applied to equity and bond exchange-traded funds (ETF)? In his April 2024 paper entitled “Effectiveness of Various Options Strategies for Exchange-Traded Funds“, Rishikesh Mahadevan tests five simple option strategies on ETFs, with all options held to expiration:

1. Covered Call – sell a call option on an ETF already owned.
2. Protective Put – buy a put option on an ETF already owned.
3. Long Call – buy a call option on an ETF.
4. Bull Call Spread – buy a call option at a relatively low strike and sell one at a relatively high strike.
5. Bull Put Spread – buy a put option at a relatively low strike and sell one at a relatively high strike.

He considers three equity ETFs (iShares Russell 1000 Growth ETF [IWF]; Vanguard Value Index Fund ETF [VTV]; and, iShares Core S&P 500 ETF [IVV]) and three bond ETFs (BND Vanguard Total Bond Market Index Fund ETF [BND]; SPDR Bloomberg High Yield Bond ETF [JNK]; and, iShares Core US Aggregate Bond ETF [AGG]). He considers three times to expiration for opening positions: 30 days, 60 days and 90 days. He considers three levels of moneyness for opening positions: at-the-money (ATM); 2% out-of-the-money (OTM); and, 5% OTM. His option prices are the average of bid and ask. He excludes extreme outliers from calculations. His benchmark is buying and holding the underlying ETF. Using daily data for the specified ETFs and associated options from the beginning of July 2016 through June 2021, he finds that: (more…)