A reader questioned why I included the BXY Buy/Write index as part of the Volatility Rotator model. I did so to present a risk adjusted component that, hypothetically, is buffered against volatility swings and should outperform the underlying market. However, further investigation has shown a curious situation.
Shown above are the charts of BXY and SPY, along with 4 tradable buy/write ETFs : ETW, ETV, ETB and PBP. While BXY tracks SPY likes a Predator missile the real life versions of the index reflect a much more benign performance including an outright divergence in mid September that continued through the end of 2010. What’s really going on here? This situation clearly requires further study, but our initial study suggests marginal utility in this highly regarded risk management strategy for the last half of 2010.
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