About one month ago an options portfolio manager wrote to me to express concern about the fact that the S&P 500® (total return) Index was up about 16% year-to-date at that time, and that the BXM Index y-t-d performance was not as strong as that of the S&P 500 Index. While it is true that the S&P 500 Index can outperform option writing indexes in times when stock prices are rising, one could note that both the PUT and BXY indexes have had higher returns than the S&P 500 over the past one-month, one-year, five-year, and 20-year periods, as shown below.
OCTOBER 2012 – % CHANGE THIS PAST MONTH
In October 2012 the S&P 500 total return index (with dividends reinvested) was down 1.8%. The option premium income received by an option writing strategy can provide a helpful “cushion” in times of falling equity markets.
On the “roll” date of October 19, 2012, (see the “roll information” at www.cboe.com/benchmarks for more info on the underlying data) the BXM Index received a premium of 1.0% (of the underlying) for selling A-T-M one- month S&P 500 (SPX) options, while the BXY Index received a premium of 0.3% (of the underlying) for selling 2% O-T-M one-month S&P 500 (SPX) options.
Below is a table with the % changes for 4 indexes in October 2012. The outperformance relative to the SPTR Index was 1.1 percentage points for the BXM Index, and 0.3 percentage points for the BXY Index (both numbers were very close to the amount of premium received, but this is not always true in every calendar month).
Both the ATM indexes (BXM and PUT) outperformed the OTM index (BXY) in the month when the S&P 500 was down.
0.3% PUT – CBOE S&P 500 PutWrite Index www.cboe.com/PUT
-0.7% BXM – CBOE S&P 500 BuyWrite Index www.cboe.com/BXM
-1.5% BXY – CBOE S&P 500 2% OTM BuyWrite www.cboe.com/BXY
-1.8% S&P 500 (TR) (SPTR)
% CHANGES OVER 1-YEAR, 5-YEAR AND 10-YEAR PERIODS
The table below shows the % changes over the past 1-year, 5-year, and 10-year periods. Note that all three of the options-based indexes had higher returns than the S&P 500 over the past 5 years, and the PUT and BXY indexes had higher returns than the S&P 500 over all three time periods shown.
% CHANGES IN CALENDAR YEARS
I am often asked “what is the relative performance of the buywrite indexes in different market scenarios?” The table below shows the % changes for the past 22 calendar years for three indexes.
- Note, for example, that the S&P 500 Index was the top performer in each of the years 1995 through 1998, as the S&P 500 Index rose by 23% or more in each of those four years.
- In 1999, the BXM Index generated quite a bit of premium in a rising market, and so the BXM was able to gain slightly more than the 21% gain of the S&P 500 Index in 1999.
- Since 1999 the S&P 500 has had four years with losses worse than 9%, and in each of those four years the options premiums received by the BXM and BXY indexes provided a cushion to help those options-based indexes have higher returns than the S&P 500.
- The BXY Index has outgained the S&P 500 in five of the last six years.
LOWER VOLATILITY FOR OPTION-WRITING INDEXES
An added benefit for some options-writing strategies is the fact that they can have less volatility than some equity strategies. Below is a chart from a January 2012 paper by Asset Consulting Group that notes that the option-based PUT, BXM, CLL and BXY indexes all have had lower volatility than the S&P 500, MSCI EAFE, and Russell 2000 indexes. Please visit www.cboe.com/benchmarks for links to this paper and other papers with similar findings.