The Connors S&P500 Buy-Write Strategy

Strategy

This approach attempts to deliver attractive risk-adjusted returns by investing in a portfolio replicating the S&P 500® and systematically writing, or selling, S&P 500 Index call options against the portfolio, resulting in cash flows that moderate portfolio volatility and provide protection in down markets. Though portfolios will not participate in gains above the strike price of the call option, reducing upside potential in strong markets, the cash flows generally enhance returns in moderately rising and stable markets. Additional capital preservation approaches may be employed using exchange-traded options as market conditions dictate.

Implementation

  • A near-term S&P 500 Index (SPX(SM)) call option is written against the S&P 500® stock index portfolio with exercise price just above the current level of the Index
  • The SPX(SM) call option has approximately one month to expiration
  • The cash received from the sale of the call option is added to the total value of the portfolio
  • The SPX(SM) call option is held to near expiration
  • There are three possibilities for the call option:
    • The S&P 500 Index® level fails to rise above the strike price and the call option expires “out-of-the-money” (worthless, full value realized)
    • The S&P 500 Index® rises above the strike price and the call option is “in-the-money” and is exercised for cash settlement
    • The S&P 500 Index® is higher or lower than the strike price and we choose to roll the option prior to expiration
  • Monthly, after expiration of the call option, the process is repeated

Attributes

  • Protection in declining markets; enhanced return in flat markets; upside potential in modestly up markets
  • Reduced volatility
  • May allow greater equity allocation
  • Transparency and liquidity
  • Limited upside in large market moves
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Our Investment Process

STEP 1

Write/sell an SPX call option just out of the money, with approximately a one month expiration

STEP 2

Monitor daily for any selling opportunities prior to expiration

STEP 3

Strategically re-purchase option or hold until expiration and then repeat process