Covered Call on an Index - A Comparative Study of Two Strategies

Abstract

This thesis undertakes a comparative analysis of two ways of performing a covered call strategy on a dual asset index. The distinguishing factor between the two approaches pertains to the writing of the call options, where one approach involves writing the call option on the entire index, while the other involves writing options on each asset within the index separately. This study is done by first, initiating an appropriate pricing method for index options using Monte Carlo simulations. Then, the two option strategies are analysed from a utility perspective by a figuration of investors with varying degrees of risk aversions. The results indicate that an investor’s risk attitude has no significant relevance in their choice of strategy, but rather that the characteristics of the underlying assets within the index are important in determining the preferred approach.