SPXX: Buy-write CEFs have actually dampened Bear Mauling – Seek Alpha | Jewelry Dukan

Eric Mandre

thesis

The Nuveen S&P 500 Dynamic Overwrite Fund (NYSE:SPXX) is a closed-end fund that falls into the buy-write strategy for stocks. According to the Fund’s literature:

The fund is designed to offer regular distributions through a strategy that attempts Attractive total returns with lower volatility than the S&P 500 Index by investing in a stock portfolio that aims to substantially track the price movements of the S&P 500 Index and by writing call options on 35% to 75% of the fund’s face value with a long-term target of 55%) to increase the fund’s risk-adjusted returns. The strategy will take into account the Fund’s tax position and apply techniques to improve the after-tax results for Shareholders.

Source: Q1 portfolio review

Many investors have flocked to call and write stocks in CEFs this year for the benefit of shorting volatility via covered calls. We’ll take a look at how SPXX has performed from this angle and whether it makes sense to hold long buy write equity CEFs rather than pure stocks when a recession is around the corner.

First, let’s take a look at year-to-date performance:

what is the return

YTD Total Returns (Looking for Alpha)

We can see from the chart above that the S&P 500 has indeed been significantly outperformed year-to-date by all buy-write CEFs in the cohort. But more importantly, we need to break down that achievement and fully understand what’s behind it. Let’s take a closer look:

where are you my star

CEF Table (Author, Morningstar)

In the table above, we have analyzed the 2022 YTD total returns for each CEF and also presented their current premiums to NAV and their 3-year average premiums to NAV.

The idea here is to try to isolate the ‘true’ CEF performance in 2022 versus a premium to NAV increase: i.e. if there were no change in premium/discount to NAV to the underlying CEF in 2022, how would the total return look like?

Important insights from the analysis:

  • All equity buy-write CEFs have seen significant premium increases in 2022
  • Excluding the premium to NAV increases, only two CEFs actually outperform the index
  • These two CEFs (BXMX and ETB) have an average outperformance of nearly 4% versus the index

It is interesting to note that the SPXX is flat against the SPY total return if we exclude the increase in the premium to NAV. The fund traded at a discount to NAV on average, but moved premium in 2022:

diagram
SPXX Discount or Premium to NAV data from YCharts

If the fund had continued to trade at its usual discount to net asset value, its performance would have been in line with the S&P 500.

The big takeaway here, however, is that perception (ie, investor sentiment) has actually led buy-write CEFs to outperform the S&P 500 this year, making them a preferred choice over pure stocks when a recession is around the corner.

Overlay information option

The fund currently writes covered calls for about 56% of the portfolio:

where is the net

Options overlay (fund website)

Below we have drawn from the Fund’s literature the definitions for each of the terms listed above:

Average call option coverage in % is the percentage of the fund’s underlying shares overridden by call options; corresponds to the sum of the notional values ​​of the call options divided by the market value of the shares in the portfolio.

Average call strike vs. spot price is the average ratio of call options’ strike prices to spot prices, weighted by the notional value of the calls. A value > 100% indicates that the options’ strike prices are, on average, above their current spot prices and the calls are “out of the money”. A number < 100% indicates that the option strike prices are on average below spot prices and the calls are "in the money".

Maximum Average Call Strike vs. Spot Price is the maximum average ratio (as defined above) of call option strike prices to spot prices during the month.

Average minimum call strike vs. spot price is the minimum average ratio (as defined above) of call option strike prices to spot prices during the month

Weighted average days to expiration are the average days to expiry of all call options in the fund’s portfolio, weighted by notional values.

Maximum weighted average days to expiry: Is the maximum average number of days to expiration during the month for all call options in the fund’s portfolio, weighted by notional values.

Minimum weighted average days to expiry: Is the minimum average number of days to expiration during the month for all call options in the fund’s portfolio, weighted by notional values.

Broadly speaking, the fund is currently writing in-the-money call options that have higher deltas and are more protective of a portfolio during a downturn due to their higher realized premiums.

Conclusion

SPXX and buy-write CEFs in general have outperformed the S&P 500 in 2022. However, if we dive into the details, we find that most CEFs have risen due to increases in premiums to NAV versus their historical averages, rather than underlying overall performance. This tells us that investors find short volatility strategies preferable to pure equity positions in recessionary environments. If we subtract premium increases from NAV versus historical averages, we find that the SPXX is actually flat against the S&P 500’s performance. In the analyzed cohort, only two CEFs actually outperformed the index when normalized for the premium-to-NAV factor. In the end, it’s performance that counts, and here’s where switching to buy-write equity CEFs is a better way to weather potential recessions than direct equity positions. However, SPXX and the other buy-write CEFs outperform due to investor perception, which is manifested in premiums to NAV, rather than the underlying short volatility strategy.

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