Volume 15 | Issue 3 | Article 3
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Covered Calls and Protective Puts: Creating Value across Economic Cycles?
The debate continues between investment advisors who recommend hedging strategies to their customers and academics who question the claims of protective puts’ and covered calls’ abilities to increase returns while reducing risk. The conflicting views may arise from the application of inappropriate performance metrics. We use Leland’s beta, a CAPM- based metric that correctly includes the impact of additional moments of the return distribution in evaluating risk-adjusted performance. The results support the value of both a protective put and a covered call strategy in reducing portfolio risk and enhancing returns during booming economic cycles. However, the results also throw a cautionary note to investors who use the covered call strategy during weak economic market cycles.
