Pension Fund Sponsor: Premium Income Generated by Option-writing Strategy

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.


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, The Exhibit noted that the BXM Index had generated gross premiums of about 1.8% per month.


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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,

9.3% BXY – CBOE S&P 500 2% OTM BuyWrite

8.4% S&P 500® Index (TR)

5.6% CLL – CBOE S&P 500 95-110 Collar Index

> 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