Covered Calls on the S&P 500: Resolution of an Anomaly

Abstract

Although most financial market anomalies have been studied in securities markets, the options market has shown evidence of its own anomaly in the performance of covered calls on the S&P 500. This finding is puzzling in that this index is clearly a zero-alpha investment with very high volume options. Though the skewness of covered calls complicates the evaluation of these strategies, previous studies have often paid little attention to skewness or attempted to control for it with various methods. We reexamine this issue by analyzing the performance of covered calls on the SPDR ETF over the period 2005-2015. Using traditional methods of analysis, we find evidence of positive abnormal returns as reported in previous studies, but superior performance manifests even when the options are correctly priced. We derive two new methods of analysis that provide better control for skewness. We also detect a holding period anomaly, whereby the specification commonly used for monthly holding periods masks the skewness. Our results show no support for the alleged superior performance of covered calls on the S&P 500.