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In light of the low yields and higher risks for many "traditional" fixed-income instruments, many investors now are exploring a variety of strategies, including the writing of index options, with the goals of enhancing yields and lowering portfolio volatility. This subject will be discussed later in this paper.
Challenge No. 2: Sluggish Equity Returns Since Year 2000
In the period from March 31, 2000 through July 31, 2012, the S&P 500 Index was up 16 percent and the MSCI EAFE Index was up 11 percent, while the CBOE S&P 500 2 percent OTM BuyWrite Index (BXY) was up 59 percent, as it collected S&P 500 index options premiums every month (see Figure 2).
The sluggish stock market performance has been a key factor in the increased disillusionment of many investors toward equity investing. One clear sign of equity disenchantment has been the net new cash flows for different types of mutual funds. As shown in Figure 3, the net new cash flow for each of the past four years (2008-2011) has been negative for equity mutual funds and positive for bond mutual funds.