Russell Investments Paper, SPX Weekly Options, and Higher Yields

As interest rates have declined over the past few decades, many investors are looking beyond traditional fixed income instruments for ways to generate higher yields that can help smooth out portfolio returns. Can the writing of SPX Weekly options help generate gross premium yields of more than 30% per year?

PAPER BY RUSSELL INVESTMENTS

A July 2012 paper by Russell Investments noted that –

“… Exhibit 8 compares 16 years of 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. Likewise, a one month option rolled three times per quarter on average generates 1.6x the premium of a three month option. This helps make clear that close to the money strategies with short tenors have consistently generated a higher level of gross income. This is a direct result of the higher theta capture versus longer dated strategies…. “

Russell Investments. Capturing the Volatility Premium through Call Overwriting. (July 2012) (available at www.cboe.com/buywrite)

SPX WEEKLY OPTIONS – VOLUME GROWTH IN RECENT MONTHS

In the past three calendar months, average daily volume for SPX Weekly options has topped 95,000 in each month. www.cboe.com/SPXW

 

On August 10 the trading volume for PM-settled SPX options at various near-term expirations was more than 88,000 contacts —

LOWER INTEREST RATES

On August 12 a story entitled “As Corporate-Bond Yields Sink, Risks for Investors Rise” was published at www.wsj.com.

This chart shows the fall in T-Bond interest rates over the past 3 decades.

 

LEARN MORE

If you want to learn more about the potential to generate options premiums, please visit these microsites —

www.cboe.com/SPXW

www.cboe.com/buywrite