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.

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.

 

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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.