Covered Call Writing: How To Beat The CBOE Buy-Write Index

Includes: SPY
by: Alan Ellman

In 2002, BXM was developed by the CBOE (Chicago Board Options Exchange) in cooperation with Standard & Poor’s. This is a benchmark index that tracks the performance of a hypothetical covered call strategy on the S&P 500 index. Data on this index can be accessed as far back as 1986. The parameters for this index are as follows:

  • Buy an S&P 500 index portfolio
  • Sell 1-month slightly out-of-the-money (SPX) options
  • Hold until expiration Friday and then cash-settled
  • Then a new 1-month, slightly out-of-the-money call is sold

Two major studies performed on the BXM concluded that BXM returns similar compound annual percentage returns as the S&P 500 index but with much less volatility:

BXM study by Callan and Associates

This was an 18-year study that determined that BXM returned annual percentages of 11.77% compared to the S&P 500 returns of 11.67%. However, BXM did so with a standard deviation (volatility) of 9.29% compared to the 13.89% of the S&P 500, one third less.

BXM study by Ibbotson Associates

This 16-year study concluded that BXM returns 12.30% per year compared to 12.20% of the S&P 500 also with two thirds the volatility.

Advantages of using BXM to traditional covered call writing

  • Less time management required
  • Less cash required
  • Instant diversification

Returns in the long run are quite similar to that of the S&P 500 but in bear markets BXM will outperform. Here is a 5-year chart of BXM compared to the S&P 500 from 2006 through mid-2011 which included the recession of 2008:

(Click to enlarge)

BXM vs. S&P 500 2006 - 2011

Although this time frame was an aberration as it included one of the worst recessions in US history, it is clear that BXM (blue) outperformed the S&P 500 (black) almost 3-to-1 (15% to 5%). generally speaking, in the long run, the returns will be similar.

How to generate greater returns: The Blue Collar Investor methodology:

  • We are not required to hold every stock in the index. We can select the best performers via fundamental, technical and common sense principles
  • We can avoid the risk of earnings reports
  • We can utilize different strike prices, not only slightly out-of-the-money strikes
  • We can initiate exit strategies, not simply wait for expiration Friday (I have written an entire book on this one topic)


BXM will mirror the returns of the S&P but with much less volatility. The BCI system will elevate the returns of BXM by implementing fundamental, technical and common sense parameters. Which approach is best for you is something only you can determine. Once educated, the right choice will be an easy one to make.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.