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


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


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.

Suggested Citation

  • Mugwagwa, Tafadzwa & Ramiah, Vikash & Naughton, Tony & Moosa, Imad, 2012. "The efficiency of the buy-write strategy: Evidence from Australia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 305-328.
  • Handle: RePEc:eee:intfin:v:22:y:2012:i:2:p:305-328
    DOI: 10.1016/j.intfin.2011.10.001

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    References listed on IDEAS

    1. Ederington, Louis & Guan, Wei, 2005. "The information frown in option prices," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1429-1457, June.
    2. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters,in: Theory Of Valuation, chapter 8, pages 229-288 World Scientific Publishing Co. Pte. Ltd..
    3. Dusan Isakov & Bernard Morard, 2001. "Improving Portfolio Performance with Option Strategies: Evidence from Switzerland," European Financial Management, European Financial Management Association, vol. 7(1), pages 73-91.
    4. Nicolas P. B. Bollen & Robert E. Whaley, 2004. "Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?," Journal of Finance, American Finance Association, vol. 59(2), pages 711-753, April.
    5. Wei, Jason & Zheng, Jinguo, 2010. "Trading activity and bid-ask spreads of individual equity options," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2897-2916, December.
    6. Fahlenbrach, Rüdiger & Sandås, Patrik, 2010. "Does information drive trading in option strategies?," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2370-2385, October.
    7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    8. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    9. Ozgur S. Ince & R. Burt Porter, 2006. "INDIVIDUAL EQUITY RETURN DATA FROM THOMSON DATASTREAM: HANDLE WITH CARE!," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 29(4), pages 463-479.
    10. J. Board & C. Sutcliffe & E. Patrinos, 2000. "The performance of covered calls," The European Journal of Finance, Taylor & Francis Journals, vol. 6(1), pages 1-17.
    11. 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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    Cited by:

    1. Tafadzwa Mugwagwa & Vikash Ramiah & Imad Moosa, 2015. "The Profitability of Option-Based Contrarian Strategies: An Empirical Analysis," International Review of Finance, International Review of Finance Ltd., vol. 15(1), pages 1-26, March.

    More about this item


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

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill


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