Yesterday both the CBOE S&P 500 PutWrite Index (PUT) and the CBOE S&P 500 2% OTM BuyWrite Index (BXY) hit their all-time highs for monthly closing values. Below is evidence suggesting that key benchmark indexes that do index option writing have had strong risk-adjusted performance over the past two decades.
RETURNS OVER 20 YEARS
Annualized returns for various total return indexes (pre-tax, with reinvested dividends, from Jan. 31, 1993 – Jan. 31, 2013) are –
- 9.5% PUT – CBOE S&P 500 PutWrite Index
- 9.3% BXY – CBOE S&P 500 2% OTM BuyWrite
- 8.6% Russell 2000 Total Return Index
- 8.4% S&P 500
- 6.4% MSCI EAFE (US$ Net)
- 5.6% CLL – CBOE S&P 500 95-110 Collar Index
- 3.8% S&P GSCI
Note that the two indexes that do index option writing (but not option buying) had the highest returns over the over the 20-year time period; the PUT Index rose 515% and the BXY Index was up 496% (see chart below). The returns for the CBOE S&P 500 95-110 Collar Index (CLL) were not as strong as those for the PUT and BXY indexes, in part because the CLL Index incurred costs in its regular purchases of protective put options.
STANDARD DEVIATIONS OVER 20 YEARS
Below are the standard deviations for 7 indexes in the two decades from Jan. 31, 1993 – Jan. 31, 2013. Note that the 3 options-based indexes have the lowest standard deviations.
- 10.7% PUT – CBOE S&P 500 PutWrite Index
- 10.8% CLL – CBOE S&P 500 95-110 Collar Index
- 12.8% BXY – CBOE S&P 500 2% OTM BuyWrite
- 15.1% S&P 500
- 17.0% MSCI EAFE (US$ Net)
- 19.6% Russell 2000 Total Return Index
- 21.8% S&P GSCI
You can visit www.cboe.com/benchmarks for more information and studies on the above indexes. Note the risk disclosures at the website; indexes are not investable, and past performance is not a guarantee of future returns. At that webpage, you can access a 2012 paper by Asset Consulting Group (ACG) entitled An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns. The ACG paper noted that both the PUT and BXY indexes had relatively strong risk-adjusted returns, as measured by both the Sharpe Ratio and Sortino Ratio.