SPX Weeklys Options (1) Record Volume Day, (2) More Than 50% in Annual Gross Premiums?

Here is an update on S&P 500® (SPXSM) WeeklysSM options www.cboe.com/SPXW:

  1. RECORD VOLUME DAY

On Friday, May 18, the SPX Weeklys options experienced trading volume of 283,751 contracts, an all-time record high volume. Below are the top 10 days for SPX Weeklys options volume:

1. 5/18/2012 283,751

2. 8/4/2011 223,247

3. 8/8/2011 221,180

4. 8/5/2011 182,908

5. 5/4/2012 181,777

6. 8/26/2011 178,588

7. 10/27/2011 177,203

8. 4/26/2012 169,975

9. 4/5/2012 167,873

10. 6/2/2011 154,669

2. COULD SPX WEEKLYS OPTIONS GENERATE GROSS PREMIUMS OF MORE THAN 50% PER YEAR?

A 12-page paper by Russell Investments entitled “Capturing the Volatility Premium through Call Overwriting” (December 2010) (available at www.cboe.com/benchmarks) explored the BXM Index and other SPX systematic call overwriting strategies, and noted that:

“ … Exhibit 6 compares the 15-year historical annual premiums received by rolling weekly, monthly, quarterly, and annual ATM options. This historical data shows that shorter term options maximize the total amount of premium received on an annual basis. A one week tenor option rolled four times per month has generated more than 2.0x the premium of a one month tenor option rolled once per month. … This helps make clear that close to the money strategies with short tenors have consistently generated a higher level of gross income. … That said, it is important to note that short tenor strategies increase the probability of capping the upside in any given period. This is the result of the increased probability of paying an exercise cost when these shorter dated ATM options expire in-the-money. …”

Here a couple of cautionary notes re: gross premiums for a strategy of selling Weeklys covered call options:

(a)  The transaction costs for selling Weeklys options every week of the year could be significant;

(b)  The net returns from a covered call strategy could be negative, and usually are less than the gross premium received.  (For a comparison regarding SPX monthly gross premiums received for the BXM Index, please see Exhibit 13 of the paper by Hewitt EnnisKnupp entitled “The CBOE S&P 500 BuyWrite Index (BXM) – A Review of Performance” (2012) (available at www.cboe.com/benchmarks)).

3.  CURRENT AVAILABILITY

The SPX Weeklys options now available —

  • were listed May 17th and
  • will expire on May 25th.

http://www.cboe.com/micro/weeklys/availableweeklys.aspx

4. MORE ON SPXW AND SPXPM OPTIONS

SPX Weeklys options trade on CBOE with PM-settlement and are listed under the root ticker symbol “SPXW”, and are commonly included in SPX (traditional) options chains which are AM-settled.

Key features of SPX Weeklys options —

> LARGE CONTRACT SIZE WITH A $100 MULTIPLIER (ten times larger than SPY options);

> CASH-SETTLEMENT;

> EUROPEAN-STYLE EXERCISE;

> SEVEN TRADING DAYS (trading in SPX Weeklys options begins on Thursdays and generally ends on the Friday of the following week).

www.cboe.com/SPXW

Separately, the C2 Options Exchange lists S&P 500 Index options with PM settlement, under the ticker symbol SPXPM, that expire on the same Friday of the month as traditional SPX options that trade on CBOE.

www.cboe.com/SPXPM