Effect of covered calls on portfolio performance

• Název práce v češtině: Vliv krytých call opcí na výkonnost portfolia
• Název v anglickém jazyce: Effect of covered calls on portfolio performance
• Akademický rok vypsání: 2020/2021
• Typ práce: bakalářská práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: Mgr. Petr Polák, M.Sc., Ph.D.
• Řešitel: skrytý - zadáno a potvrzeno stud. odd.
• Datum přihlášení: 04.04.2023
• Datum zadání: 04.04.2023
• Datum potvrzení stud. oddělením: 24.04.2023
• Datum a čas obhajoby: 12.09.2023 09:00
• Místo konání obhajoby: Opletalova, O105, místnost č. 105
• Datum odevzdání elektronické podoby: 27.07.2023
• Datum proběhlé obhajoby: 12.09.2023
• Oponenti: Mgr. Lukáš Vácha, Ph.D.

Seznam odborné literatury

Diaz, M., & Kwon, R. H. (2017). Optimization of covered call strategies. Optimization Letters, 11(7). https://doi.org/10.1007/s11590-016-1083-8

Diaz, M., & Kwon, R. H. (2019). Portfolio optimization with covered calls. Journal of Asset Management, 20(1). https://doi.org/10.1057/s41260-018-00106-0

Diaz, M., & Kwon, R. H. (2020). Optimization of covered calls under uncertainty. Optimization and Engineering, 21(4). https://doi.org/10.1007/s11081-020-09492-0

Feldman, B., & Roy, D. (2004). Passive Options-based Investment Strategies : The Case of the CBOE S & P500 BuyWrite Index. Journal of Investing, 14(2).

Figelman, I. (2008). Expected return and risk of covered call strategies. Journal of Portfolio Management, 34(4). https://doi.org/10.3905/jpm.2008.709985

Whaley, R. E. (2002). Return and risk of CBOE buy write monthly index. Journal of Derivatives, 10(2). https://doi.org/10.3905/jod.2002.319194

Předběžná náplň práce v anglickém jazyce

The research question of this thesis will be to see whether there is an incentive to include covered calls into portfolio of investors.

The motivation for this paper stems from two directions. First is the seemingly abnormal performance of covered call strategy during bearish and constant markets as well as a rapid increase in interest of retain investors in options. According to Bloomberg, since 2019, the number of option contracts has more than doubled and the interest has a rising trend. The reasons can be various, ranging from the decreasing commissions on entering into the option contracts to speculative or hedging intentions of investors. Therefore, it is of interest to examine when the strategy can be implemented by the investor, in what market conditions or under what risk preferences and when the investor should opt to not include the strategy.

The work will examine to what extent is the risk of the investment decreased when covered call strategy is employed, how is it possible to improve the portfolio using the covered call strategy or what are the returns of respective strategies in different market conditions.

The work will focus on ETF as the underlying for the option strategy, particularly ETF tracking the S&P 500 index. Moreover, a CBOE BXM theoretical index will be used to provide a benchmark for the performance of the covered call strategy and help make comparisons.

Research question and motivation
The research question of this thesis will be to see whether there is an incentive to include covered calls into portfolio of investors.

The motivation for this paper stems from two directions. First is the seemingly abnormal performance of covered call strategy during bearish and constant markets as well as a rapid increase in interest of retain investors in options. According to Bloomberg, since 2019, the number of option contracts has more than doubled and the interest has a rising trend. The reasons can be various, ranging from the decreasing commissions on entering into the option contracts to speculative or hedging intentions of investors. Therefore, it is of interest to examine when the strategy can be implemented by the investor, in what market conditions or under what risk preferences and when the investor should opt to not include the strategy.

The work will examine to what extent is the risk of the investment decreased when covered call strategy is employed, how is it possible to improve the portfolio using the covered call strategy or what are the returns of respective strategies in different market conditions.

The work will focus on ETF as the underlying for the option strategy, particularly ETF tracking the S&P 500 index. Moreover, a CBOE BXM theoretical index will be used to provide a benchmark for the performance of the covered call strategy and help make comparisons.







Contribution
The work will provide evidence for the covered calls on ETF as a means to outperform the classical ETF which has been considered one of the best performing types of instruments. The results of this work should help in decision-making processes of investors who wish to opt for hedged investing options with lower risk of loss and better risk-adjusted returns.

Methodology
The data will be mainly collected from Refinitiv Eikon Datastream and Yahoo Finance as they offer wide range of stocks and long time frames, usually since the listing of the ETFs on the exchange. The paper will use data about the Greeks of the options, to evaluate how changes in Greeks affect the pay-out of the stock as well as ideal time of maturity of the contracts. Furthermore, the work will use metrics to evaluate to the total return and risk of an portfolio as well as the adjusted return and risk.
Outline
Introduction
a. Importance of the topic
b. Findings from the paper
Defining options
a. Basic definitions and types of options
b. What are options used for
c. Trading strategies with options
d. Pricing of options
Literature review
a. Overview of papers covered
b. Findings on return and risk adjusted return
c. Findings on risk of the portfolio
d. Maturity of the options used
Data and methodology
a. Data selection
b. Backtesting of the returns
c. Length of the investment
Results and Discussion
a. Interpretation of results
b. rejecting or non-rejecting the hypotheses
Conclusion
a. summary of findings
Bibliography