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The efficiency of the buy-write strategy: Evidence from Australia

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  • Mugwagwa, Tafadzwa
  • Ramiah, Vikash
  • Naughton, Tony
  • Moosa, Imad

Abstract

We examine the performance of the buy-write option strategy (BWS) on the Australian Stock Exchange and analyse whether such an investment opportunity violates the efficient market hypothesis on the basis of its risk and returns. This study investigates the relationship between buy-write portfolios returns and past trading volume and other fundamental financial factors including dividend yield, firm size, book to market ratio, earnings per share (EPS), price earnings ratio and value stocks within these portfolios. We also test the profitability of the buy-write strategy during bull and bear markets. Consistent with the literature, it is observed that BWS offers superior risk adjusted returns for low levels of out-of-moneyness and contrary evidence is observed for deeper out-of-money portfolios. Consistent with a preference for options with a maturity of around 3 months in Australia, this research shows that quarterly rebalancing periods offer better returns for the BWS.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 22 (2012)
Issue (Month): 2 ()
Pages: 305-328

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Handle: RePEc:eee:intfin:v:22:y:2012:i:2:p:305-328

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Web page: http://www.elsevier.com/locate/intfin

Related research

Keywords: Buy-write strategy; Option; Equity; Portfolio performance; Efficient market;

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  8. Damodaran, Aswath & Lim, Joseph, 1991. "The effects of option listing on the underlying stocks' return processes," Journal of Banking & Finance, Elsevier, vol. 15(3), pages 647-664, June.
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