A Smarter Way to Rebalance with the BuyWrite Index (BXM)


As advisors begin mid-year rebalancing of client portfolios, they face a dilemma.

While investors have enjoyed a 9-year Bull Market—including a 21.14% total return by the S&P 500 in 2017—their investment portfolios have built up more equity risk. Absent rebalancing, a standard 60/40 equity/bond portfolio might now resemble a riskier 75/25 allocation.

Given these sizable gains, many clients are reluctant to rebalance portfolios for fear of paying a big tax bill.

So how can advisors and their clients rebalance portfolios without incurring capital gains? Some are turning to a Buy-Write options strategy. The “Buy” part of the phrase includes stocks that an investor already owns, while “Write” refers to using options to rebalance the risk of client portfolios in a more tax-efficient manner.

Buy-Write in Four Steps

According to the CBOE, a Buy-Write strategy is “an investment strategy in which an investor buys a stock or a basket of stocks, and also writes covered call options that correspond to the stock or basket of stocks. Buy-Write strategies have an added attraction to some investors in that Buy-Writes can help lessen the overall volatility in many portfolios.”

Many investors execute this strategy around the CBOE S&P 500 Buy-Write Index (BXM), a benchmark index designed to track the performance of a hypothetical  Buy-Write strategy on the S&P 500 Index (SPX).

Here are some steps advisors consider when setting up a Buy-Write strategy for a client:

  1. Determine equity beta for all holdings in a portfolio: This includes calculating the amount of equity market exposure inherent in their client’s underlying portfolio.
  2. Calculate the difference between current and target exposure: This number will determine the magnitude of the overlay strategy that will run in tandem with the client’s portfolio.
  3. Implement option overlay: Sell call options on the S&P 500 in the appropriate amount to bring current exposures in line with a client’s risk tolerance.
  4. Monitor: Manage the option component in the existing account and make adjustments as markets move.

An illustrative example

The following scenario is familiar to many advisors: a client who just a few years ago had a $700,000 taxable account with a 60/40 equity/bond allocation now has a $1,000,000 nest egg. But outsized gains in the S&P 500 and other stock indices have pushed the portfolio to 75 percent equities and 25 percent bonds.

To rebalance back to 60/40, an advisor would need to reduce the portfolio’s equity exposure by $150,000, or 15 percent of the total portfolio value. Selling could mean a big tax hit and clients are often wired to avoid such actions.

Assuming the equity portion of the sample portfolio above is similar to the S&P 500, executing the buy-write strategy with S&P 500 call options can be a relatively simple and tax-efficient way to bring a portfolio back in line with client objectives.

To do so, an advisor could write, or sell, a call option on the S&P 500 Index (SPX) in relation to the client’s equity allocation that is overweight. In this case, implementing a 30 percent overlay of at-the-money calls would bring the portfolio’s risk profile back to its original 60/40 mandate.

Am I Eligible To Use The Strategy Center?

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Maisie Hughes

Head of Family Office Services

Maisie is responsible for business development and client portfolio management for SpiderRock’s family office clients and prospects. She began her career at Goldman Sachs Asset Management, and since 2006 has worked with institutional clients in a business development capacity in both traditional and alternative asset classes. Prior to joining SRA, Maisie was a Vice President and Business Development Manager at Wellington Management Company in Boston where she worked to broaden the scope and scale of the firm’s engagement with family offices, wealth advisors and private investors. Prior to Wellington, Maisie spent 7 years on the business development team at AQR Capital Management in Greenwich, ending as a Vice President responsible for institutional sales and relationship management in the Southeast and Mid-Atlantic United States as well as Canada.