NEW YORK — Covered call strategies are not just insurance for portfolios anymore, they are becoming sources of alpha.
For return-starved plan sponsors facing rising liabilities, weak expected returns from the equity and bond markets and a flat yield curve, a new source of excess return would be welcome news.
Research from Goldman Sachs & Co., New York, and the Chicago Board Options Exchange shows that covered call strategies, also known as buy-write strategies, can deliver stronger long-term risk-adjusted performance than long-only investing. But few pension plans — burned by buy-writes in the 1990s — are willing to engage in the strategy, in which an investor purchases a stock or index and simultaneously writes a call option on it.
Jason Ungar, director of Ansbacher Investment Management Inc., New York, which actively manages options, said pension executives should look at covered call strategies as a form of enhanced indexing. The 2-year-old firm manages about $200 million in buy-write strategies. He said covered calls are a better option than futures-based enhanced index strategies that seek to deliver excess return via a fixed-income portfolio, such as Newport Beach, Calif.-based Pacific Investment Management Co.'s popular StocksPLUS fund.
"Plan sponsors don't want to write call options, but they are investing in portable alpha strategies that make crazy yield curve plays," said Mr. Ungar. "Predicting the yield curve isn't possible."