Mr. John Colville, Chief Investment Officer, City of Sacramento spoke at CBOE’s 29th Annual Risk Management Conference™ in California on Monday, March 4th.
Mr. Colville spoke on a panel that covered the topics of Using Short Options Positions to Manage and Lower Volatility of an Equity Portfolio —
-Pros and cons of using index options versus individual equity options
-Creating a portfolio of staggered and laddered option positions to mitigate pin risk and lower overall volatility,
-Different types of option contacts to use and benefits of each: traditional listed, FLEX, OTC, weeklys,
-Using technical and volatility analysis for dynamic strike and tenor selection,
-Implementing options-based programs in a pension plan.
GROSS PREMIUMS AND NET RETURNS
Mr. Colville discussed the gross premiums and net returns that can be generated by an option-writing strategy.
Exhibit 13 of a 2012 paper by Hewitt EnnisKnupp – “The CBOE S&P 500 BuyWrite Index (BXM) – A Review of Performance” provides an illustration of gross premiums (in blue) and net returns (in green) for the BXM Index, www.cboe.com/BXM. The Exhibit noted that the BXM Index had generated gross premiums of about 1.8% per month.
INDEX RETURNS AND VOLATILITY OVER 20 YEARS
For four indexes for the 20-year time period ending Feb. 28, 2013 –
> here are annualized returns —
9.5% PUT – CBOE S&P 500 PutWrite Index www,cboe.com/PUT
9.3% BXY – CBOE S&P 500 2% OTM BuyWrite www.cboe.com/BXY
8.4% S&P 500® Index (TR)
5.6% CLL – CBOE S&P 500 95-110 Collar Index www.cboe.com/CLL
> and below are the 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 (TR)
The PUT and BXY Indexes both had higher returns and lower volatility than the S&P 500 over the past two decades.
Please note that indexes are not investable and usually do not reflect transaction costs, and that past performance is not a guarantee of future returns.
Certain option-writing strategies do have the potential to boost income and lower portfolio volatility. For links to white papers and more benchmark index information, please visit www.cboe.com/benchmarks.