Definition
The term buy-write index refers to a benchmark that provides investors with insights into the performance of covered call strategies. Investors use buy-write strategies to add income to an investment's return while lowering volatility.
Explanation
A buy-write index is designed to mimic the performance of a buy-write strategy applied to the portfolio of securities such as the DJIA, S&P 500, or Russell 2000. Also referred to as a covered call, a buy-write is a strategy in which the investor holds a stock or portfolio of stocks, while at the same time selling call options on these securities.
The Chicago Board Options Exchange (CBOE) provides investors with several buy-write indices, which can be used by investors to benchmark the performance of this strategy. Generally, a buy-write will underperform stocks when their prices are increasing, and outperform stocks when their prices are declining.
Related Terms
The term covered combination refers to the simultaneous sale of an out-of-the-money covered call and secured put. Covered combinations can be used by investors that already own the securities or the securities can be purchased when the contracts are written.
Moneyzine EditorJanuary 12th, 2024
The term cash-secured put refers to the strategy of selling a put contract with the intent to purchase the security when it trades at a price that is lower than its current market price. A cash-secured put involves both writing the option and depositing cash in a sweep account to purchase the underlying security.Moneyzine EditorJanuary 10th, 2024- The term protective put refers to the strategy of buying one put contract for every 100 shares of the underlying stock owned. Protective puts are a form of insurance, shielding the individual's investment from market volatility.Moneyzine EditorSeptember 21st, 2023
The term index put refers to the strategy of buying a put contract to limit the downside risk of a portfolio of stocks. As is the case with protective puts, index puts provide investors with a hedge against a down market, while maintaining unlimited upside potential.Moneyzine EditorJanuary 22nd, 2024
