Options Strategies with Long Stock Positions

Can holders of popular large-capitalization stocks improve portfolio performance by systematically buying or selling options on these stocks? In their February 2024 paper entitled “The Performance of Options-Based Investment Strategies: Evidence for Individual Stocks from 2004 to 2019”, Zhuo Li and Thomas Miller, Jr. compare to buy-and-hold the performances of four strategies that augment a long stock position with options, as follows:

1. Buy and hold the stock.
2. Covered call  – long stock plus short call.
3. Protective put – long stock plus long put.
4. Collar – long stock plus short call plus long put.
5. Covered combination – long stock plus short call plus short put.

They focus on 10 stocks widely held in 401(k) plans: ExxonMobil, Comcast, Berkshire Hathaway (Class B), Oracle, Microsoft, Coca-Cola, Amazon, Wells Fargo, Google (Class A) and Apple. They roll at the end of each calendar month from the standard monthly option that expires during the next month to the one that expires during the subsequent month. They choose option strike prices that are at least 5% out-of-the-money but as close to 5% as possible, with exceptions when no such options are available. They assume option buys and sells are at the daily closing bid-ask midpoint. They ignore the possibility of early option exercise. Using monthly data for the selected 10 stocks and specified options as available during January 2004 through November 2019, they find that: (more…)