Recently I have heard some observers ask whether options strategies have performed well when compared with stock-based and commodity-based strategies. Various options investors can have different investment goals when using options; options can be used with the goals of hedging risk, adding income, implementing a position that reflects one’s future view on the markets, or enhancing risk-adjusted returns.
CBOE’s BENCHMARK INDEXES OVER 20 YEARS
As shown in the four charts below, two CBOE benchmark indexes, the CBOE S&P 500 2% OTM BuyWrite Index (BXY) and CBOE S&P 500 PutWrite Index (PUT), had relatively stronger returns and lower volatility over the past two decades when compared to four well-known benchmark indexes – the S&P 500, Russell 2000 Index, MSCI EAFE Index (for non-U.S. stocks) and S&P GSCI Index (for commodities). In the two decades ending May 31st, the BXY rose 512%, PUT rose 504%, S&P 500 was up 435%, and S&P GSCI rose only 92%. The PUT and BXY indexes also both had much less volatility than the other four indexes.
A couple other CBOE benchmark indexes also had relatively low standard deviations over the 20-year period – 11.1% for the CBOE S&P 500 BuyWrite Index (BXM) and 10.8% for the CBOE S&P 500 95-110 Collar Index (CLL). The annualized returns over the two decades were 8.0% for the CBOE S&P 500 BuyWrite Index (BXM) and a lower 5.9% for the CBOE S&P 500 95-110 Collar Index (CLL). One of the reasons that the PUT and BXY (index option-selling) indexes had higher returns than the CLL and other indexes above is the fact that implied volatility usually has been higher that realized volatility for S&P 500 options over the past two decades, and sellers of richly priced index options can be rewarded with relatively strong risk-adjusted returns.
WHITE PAPERS – INDEX OPTIONS AND STRONG RISK-ADJUSTED PERFORMANCE
If you would like to learn more about adding premium income, lowering portfolio volatility and enhancing risk-adjusted returns, please visit www.cboe.com/benchmarks to see more about CBOE’s benchmark indexes and to read the papers below. Please note that stock indexes often outperform many options-based benchmark indexes in rising bull markets.
- Hewitt EnnisKnupp. The CBOE S&P 500 BuyWrite Index (BXM) – A Review of Performance (2012)
- Asset Consulting Group. An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns (January 2012)
- Callan Associates.“An Historical Evaluation of the CBOE S&P 500 BuyWrite Index Strategy.” (October 2006).
- Cambridge Associates, LLC. Highlights from the Benefits of Selling Volatility (2011)
- Ennis Knupp & Associates.“Evaluating the Performance Characteristics of the CBOE S&P 500 PutWrite Index” (December 2008).
- Fund Evaluation Group.“Evaluation of BuyWrite and Volatility Indexes: Using the CBOE DJIA BuyWrite Index (BXD) and the CBOE DJIA Volatility Index (VXD) for Asset Allocation and Diversification Purposes.”(2007).
- Ibbotson Associates.“Highlights from Case Study on BXM Buy-Write Options Strategy.” (2004).
- Russell Investments. Capturing the Volatility Premium through Call Overwriting. (July 2012)