Sell in May and Go Away Alternatives (Part 1-BXM)

I love Wall Street sayings.  There is usually some truth behind them, but being a numbers guy I always like to trust these statements but also do some verification.  The Wall Street saying that comes around this time of year is, “Sell in May and go away”.  This basically means that investors would do well by only being in the stock market from November to April each year and then exit the market from May through October.  For the heck of it (and because I like to play with numbers) I took a look at how often the S&P 500 Total return was higher and how often it has been lower over the last 20 years during the period when those that sell in May would not be in the market.  It turns out the total return for holding an S&P 500 portfolio was higher 14 of the last 20 years from the last day of April through the last day of October.  That’s 70% of those years where the S&P 500 total return has been positive, so maybe sell in May and go away isn’t what it used to be.

Being an option guy I started thinking about different approaches as opposed to getting out of the stock market at the end of April each year and buying back on the first day of November.  I decided to take a look at the performance of some of the strategy indexes quoted by CBOE over this six month time period.  The results were pretty darn startling and so extensive that I’ve decided to break this up into a three part blog series.  Tonight is all about the CBOE S&P 500 Buy-Write Index (BXM).

As a refresher, BXM shows the performance of a hypothetical buy-write strategy on the S&P 500 Index.  On standard SPX option expiration dates the strategy buys (or owns) a portfolio that replicates the S&P 500 and sells a near-term S&P 500 (SPX) call option which expires on the following month’s standard expiration date.  The call option strike is the next strike higher than where the S&P 500 is trading at a certain time.  For a full explanation of this strategy index check out

The BXM is implemented on option expiration dates so I thought it made sense to take a look at tracking this strategy from April option expiration through October expiration.  Since we are tracking an index that implements a strategy on an option expiration date I altered the sell in May idea to replicating BXM from April expiration to October expiration and then being long the S&P 500 index from October expiration through April expiration.  The dates are slightly different, but the idea is the same.  Also, I believe this is a bit more logical as there would be some real uncertainty regarding how to enter or exit the BXM strategy on dates that are between expiration.  I also included a strategy that is long the S&P 500 from October expiration to April expiration and then buys a six month certificate of deposit to represent being in cash and out of the stock market from April expiration to October expiration.  There is a final strategy that is part of this study – that involves buying a portfolio to replicate the S&P 500 and holding it.  No rebalancing is necessary.  The period for this study covers April 15, 1994 through April 18, 2014 both standard SPX option expiration dates.

Since there are a lot of moving parts I’m going to break out what each of the strategies shown on the chart below represent –

SPX TR – total return (price appreciations plus dividends) of just buying an S&P 500 portfolio.

SPX + BXM – total return of the S&P 500 from October expiration to April expiration + return of the CBOE S&P 500 Buy-Write Index from April expiration to October expiration.

SPX + Cash total return of the S&P 500 from October expiration to April expiration + six month certificate of deposit rate from April expiration to October expiration.

BXM Performance

The chart above shows the growth of $100 following each of the three potential methods (if you include ignoring it) for approaching the “sell in May” market philosophy.  Note that the SPX + BXM strategy mirrors the return of the SPX + Cash approach but tends to out-perform over time with some underperformance popping up when the stock market comes under pressure.  Without taking transaction costs into account a portfolio that is in the S&P 500 from October expiration through April expiration and then implementing the BXM strategy for the other six month period results in $100 growing to $802.58.  Going to cash at April expiration and then buying back into the stock market at October expiration results in a $100 portfolio growing to $780.58.  Coming in third is the S&P 500 total return where $100 grows to $728.76 over this 20 year period.

So there is some merit to sell in May and go away, but there are also other alternatives.  Instead of selling your portfolio, maybe selling SPX call options is a strategy worth exploring.  That’s not the only strategy that is an alternative to going to cash.  Tomorrow we will take a look at how the CBOE S&P 500 2% OTM Buy-Write Index (BXY) works as a substitute for exiting stocks during the warmer months in Chicago.

  • Yuri Hoffman

    Good one Russell. Other ideas for future blogs could be seasonal changes in commodity options.


    Yuri Hoffman