Two BlackRock Papers: (1) Volatile September, and (1) VIX Your Portfolio

BlackRock recently published these two papers —

The BlackRock paper on September volatility noted that —

“Volatility is likely to increase into September when the Federal Reserve (Fed)’s tapering announcement is expected, Germany will hold an important federal election and the US budget debate will likely heat up again. In addition, September is historically the worst month of the year for stocks …”

The BlackRock paper on “VIX Your Portfolio – Selling Volatility to Improve Performance” noted that – “A strategy that systematically sells volatility on a diversified equity index should capture a positive risk premium over long horizons because it is similar to selling insurance,” and the paper highlighted three volatility-selling strategies –

1.   Selling S&P 500® (SPX) index options per the CBOE S&P 500 PutWrite Index (PUT),
2.   Selling one-month O-T-C variance swaps, collateralized with Treasury bills,
3.   Selling futures on the CBOE Volatility Index® (VIX®), collateralized with Treasury bills.

Exhibit 8 of the paper shows that, over the period from April 2004 through December 2012, all three volatility selling strategies had higher returns, lower volatility, higher Sharpe ratios, and less severe maximum drawdowns than the S&P 500 Index.

11BlackRock VIXYr Portfolio Table Ex 8

CBOE CHARTS

After reviewing the two papers by BlackRock and doing some more analysis, it is interesting to note that:

(1) Over the past 13 years, there have been four months of September in which the S&P 500 fell by more than 8 percent, while the BXM and PUT indexes fell by more than 8% in only one September over the past 13 years; the SPX options premiums received by the BXM and PUT indexes helped cushion the falls of the indexes (see table below);

(2) Over the past 13 years, the CBOE Volatility Index® (VIX®) rose more than 20% in 6 different Septembers (please see the table below, and the recent CBOE Blog “Is September the Cruelest Month for Stock Investors?”);

(3)  From month-end June 1986 through August 2013, the CBOE S&P 500 PutWrite Index (PUT) rose 1322% and the S&P 500 Index rose 1117% (see line graph below).

12 charts for BlackR Blog

Listed options can serve as flexible, powerful and efficient tools to hedge portfolios and add income to smooth out returns.  Protective strategies include, collars, long SPX protective puts, and  long VIX calls. For white papers on benchmark indexes, please visit www.cboe.com/benchmarks.