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GSAM Connect 
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October 19, 2016

GSAM Connect

October 19, 2016 | GSAM Connect

Is Now Right to ‘Buy-Write’?

In today’s challenging market environment, US equity large-cap valuations are elevated versus history, European growth is questionable, and forward-looking equity return expectations are muted. We think this environment is one where buy-write strategies can deliver the yield, returns, and volatility benefits that many investors are seeking. 

Buy-write strategies offer exposure to equities but also seek additional income through call-option premiums. In times of flat equity returns, these strategies have often outperformed. For instance, a global buy-write approach of writing call options on a 50/50 mix of S&P500 and EuroStoxx50 indices has beaten a plain 50/50 blend of the S&P500/EuroStoxx50 more than 2/3 of the time when the global blend returned between -5 and 5% (Exhibit 1). The global buy-write strategy outperformed 100% of the time when the global S&P500/EuroStoxx50 blend declined by more than 5%. As well, the magnitude of outperformance is often impressive. Buy-write shows 5.5% better returns than just holding equities in flat markets and above 11% better returns in severe down markets. 

EXHIBIT 1: BUY-WRITE STRATEGIES’ HISTORICAL PERFORMANCE

exhibit 1- buy write-emea-01

Source: Bloomberg and GSAM. Data as of 3 October 2016. Buy-Write strategies are represented by a 50/50 blend of the CBOE S&P500 BuyWrite Index and the EuroStoxx50 BuyWrite (100%) Index. Analysis from January 2002, the inception of the EuroStoxx50 BuyWrite (100%) Index through September 2016. Frequency of outperformance is calculated by comparing the percentage of times the BuyWrite blend outperformed the 50/50 blend of S&P500 Net Total Return Index and EuroStoxx50 Net Total Return Index on a 12 month rolling return basis. All indices are denominated in EUR. The average outperformance is calculated over the same time period. A Buy-Write strategy refers to an investment strategy that consists of receiving call premiums on an underlying equity position to generate income from the premiums. The CBOE S&P BuyWrite and EuroStoxx50 BuyWrite indices’ performance are not necessarily reflective of all Buy-Write strategies. Past performance does not guarantee future results, which may vary.


Of course the risk is that markets continue the strong run of the past few years—in times of high equity returns, these strategies have often trailed the broader equity market. So a buy-write strategy will not be appropriate for all clients and in all climes.

However because of its characteristics, we do think buy-write strategies are a particularly interesting investment for one particular type of investor: income-seeking investors.

Income investors (as I mentioned last month in my post Income Investors Search for Longevity - Sanity) are particularly prone to the downfalls of higher volatility and drawdowns. Because these investors are taking distributions, it is extra important to avoid large drawdowns which can quickly swamp the principal in the portfolio and lead to early portfolio depletion. So a buy-write strategy can tick two important boxes for an income-seeking investor:

  1. Lower drawdowns from equities—particularly important if you have reduced your holdings in core-fixed income because of low rates, and
  2. Higher yield from equities—within the boundaries as explained above—without being forced to overweight higher yielding countries (like the UK) or sectors (like Utilities)

If traditional equity indexes deliver less impressive returns in the coming years (which we expect will be the case), buy-write strategies could play an important role in investor portfolios.


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About the Author

Brendan McCurdy

Brendan McCurdy

Vice President, Portfolio Strategy, Strategic Advisory Solutions, Goldman Sachs Asset Management

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