A 2013 paper by BlackRock 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.
GROWTH OVER 28 YEARS
Now that we have passed the halfway point of 2014, one might ask for an update on performance of indexes relating to volatility-selling strategies highlighted by the BlackRock paper. The price data history for both the PUT and BXM indexes begins on June 30, 1986, and so we now have 28 years of price history for these indexes. The two bar charts below show that the PUT Index has had both the highest returns and lowest volatility of all the five indexes shown. What is a source of strong returns for the PUT Index? The PUT Index sells S&P 500 index options every month, and multiple studies (at www.cboe.com/benchmarks) have shown that the S&P 500 options usually have been richly priced in recent decades, as the implied volatility usually has been higher than the subsequent realized volatility.
Over the 28-year period from mid-1986 through mid-2014, here are the gains for key total return indexes — the PUT Index rose 1510%, the S&P 500 Index rose 1386%, and the S&P GSCI (commodities) index rose 553%.
GROWTH IN FIRST HALF OF 2014
In regard to exchange-listed products, the 2013 BlackRock paper discussed both selling of SPX options (per the PUT Index) and the selling of VIX futures. VIX futures were introduced in 2004 and so we do not yet have a multi-decade view of VIX futures performance.
In the first half of 2014, the CBOE VIX Premium Strategy Index (VPD) rose 7.1%. The VPD Index tracks the performance of a strategy that systematically sells 1-month VIX futures, and also holds a money market account (more details are at www.cboe.com/VPD). All ten benchmark indexes in the chart below rose in the first half of 2014.
To read more studies about CBOE benchmark indexes, please visit www.cboe.com/benchmarks,