A Dozen Positive Developments in 2015 for Investors in Options

Over the past decade I have delivered more than 200 presentations around the world to groups of investors such as pension funds and/or investment advisors. During the presentation events I solicit feedback from investors on the topics which are of interest. Below is a list of 12 positive developments in 2015 for investors in options.

  1. CAPACITY AND LARGE NOTIONAL SIZE FOR SPX OPTIONS VOLUME

Liquidity and capacity often are key concerns of institutional investors who are considering investing sizable amounts in any markets. A starting point to try to gain an idea of the capacity of a market often is to examine the notional value of trading. The estimated notional value for average daily volume in S&P 500 (SPX) options rose from $13 billion in 2000, to more than $170 billion in 2014. SPX options have had the largest notional value of trading volume (by far) of any options class in recent years. When looking at notional volume figures for options, some analysts apply a delta-weighting adjustment of 0.5. mm1 - Notional SPX

  1. CalSTRS AND OTHER PENSION FUNDS

In recent years several pension funds have explored the S&P 500 (SPX) options and the BXM buywrite benchmark index as key instruments in making initial allocations to an options-based investment program.  The California State Teachers’ Retirement System (CalSTRS) is the largest teachers’ retirement fund in the United States with around $185 billion in AUM; in recent years CalSTRS studied the BXM Index, and in 2015 CalSTRS made an initial allocation to managers who run buy-write programs using SPX options. In the pension world there often is a herd mentality with many pension funds following the lead of the biggest California funds in terms of allocations to newer assets. Reports indicate that other pension funds have explored the BXM Index and made allocations to options programs, included among these funds are the Santa Barbara County Employees Retirement System, the Hawaii Employees Retirement System, the Los Angeles Department of Water and Power Employees Retirement Plan, the Seattle City Employee Retirement System and the Alaska Retirement Management Board.

  1. MORE THAN 110 SEC-REGISTERED FUNDS USE OPTIONS

Prior to this year I received questions as to which mutual funds were invested in options, and I did not have definitive information to provide in reply. Early this year a new paper was published by Keith Black and Edward Szado, entitled – “Performance Analysis of Options-Based Equity Mutual Funds, CEFs, and ETFs.” The Black-Szado paper noted that the first SEC-registered funds focused on the trading of options were launched in the U.S. in 1977, and by 2003 there were twelve such funds. Over the last ten years the category has grown substantially, to the point where (at the end of 2014) there were at least 119 SEC-registered funds (including mutual funds, closed-end funds (CEFs), and exchange-traded funds (ETFs)), with an aggregate of more than $46 billion in assets under management (AUM), that are focused on the use of exchange-listed options for portfolio management purposes. www.cboe.com/funds

  1. LESS VOLATILITY FOR KEY OPTIONS STRATEGIES

The Black-Szado paper found that, over the last 15 calendar years, the options-based funds had lower standard deviations than the S&P 500, S&P GSCI, and Citigroup 30-year Treasury bond indexes.  Over the past 26 years, both the CBOE S&P 500 PutWrite Index (PUT) and the CBOE S&P 500 2% OTM BuyWrite Index (BXY) had lower volatility than the S&P 500® stock index.

  1. HIGHER RISK-ADJUSTED RETURNS

The Black-Szado paper found that, over the last 15 calendar years, the options-based funds had higher risk-adjusted returns (as measured by the Sharpe Ratio, Sortino Ratio, and Stutzer Index) than the S&P 500 and S&P GSCI indexes. Over the past 26 years, both the CBOE S&P 500 PutWrite Index (PUT) and the CBOE S&P 500 2% OTM BuyWrite Index (BXY) had lower volatility than the S&P 500® stock index. A key source of strong risk-adjusted returns has been the fact that the index options usually have been richly priced.

  1. HIGHER RETURNS FOR SELECT OPTIONS STRATEGIES

The Black-Szado paper found that, over the last 15 calendar years, the options-based funds had higher returns than the S&P GSCI Index, and returns similar to the S&P 500 Index. The chart in the section below shows higher returns for the PUT Index.

  1. PUT INDEX, CASH-SECURED PUT WRITING STRATEGY, AND A NEW ETF

A decade ago the buywrite strategy had gained more acceptance as a prudent investment strategy (particularly after the launch of CBOE’s BXM Index), but many investors still thought of short options positions as being inherently imprudent and overly risky. However, the cash-secured put writing strategy can have less volatility than a related stock index. In 2007 CBOE launched the CBOE S&P 500 PutWrite Index (PUT), an index that is designed to sell a sequence of one-month, at-the-money, S&P 500 Index puts and invest cash at one- and three-month Treasury Bill rates. As shown in the charts below, over a period of almost 29 years, the PUT Index had higher returns and less volatility than four other key indexes.mm7 - PUT Returns Stand Dev

The 2015 Black-Szado study lists a number of recently launched mutual funds that engage in cash-secured put writing. In addition, in 2015 WisdomTree Asset Management filed with the SEC to offer the first-ever licensed ETF designed to track the PUT Index. www.cboe.com/PUT

  1. WEEKLY OPTIONS ON SPX AND VIX INDEXES

CBOE pioneered the short-term options space in 2005 with the introduction of the first weekly expiring options contract. The popular Weekly options can provide opportunities for investors to implement more targeted buying, selling or spreading strategies. Average daily volume for SPX Weekly options grew from 15,133 in 2010 to more than 265,000 so far in 2015. www.cboe.com/SPXWmm8 - SPX Weekly volume

VIX Weekly futures are expected to begin trading at CBOE Futures Exchange (CFE®) in July, subject to regulatory review. VIX Weekly options are expected to begin trading at CBOE shortly thereafter, also subject to regulatory approval.

  1. FUTURES AND OPTIONS ON VOLATILITY INDEXES

CBOE Holdings offers options and futures on a number of volatility indexes; these tools enable investors to trade volatility independent of the direction or the level of stock prices. Whether an investor’s outlook on the market is bullish, bearish or somewhere in between — options and futures on volatility indexes can provide the ability to diversify a portfolio or hedge, mitigate or capitalize on broad market volatility. Average daily volume for futures at CFE rose from 17,470 in 2010, to 187,354 in the first quarter of 2015. Average daily volume for VIX options rose from 247,826 in 2010, to 424,581 in the first quarter of 2015. Many investors are concerned about the rising correlations of many assets in times of stress, but on days when stock indexes have had steep declines, some volatility indexes have risen by 20% or more.mm9 - Vol indexes daily changes

  1. CASH-SETTLED OPTIONS ON FTSE AND RUSSELL INDICES

Over the past 12 years, the aggregate total trading volume for options on the Russell 2000® (RUT) Index is more than 190 million contracts. In 2014 the average daily notional value of trading in Russell 2000 options was more than $10 billion. Building on the success of the Russell 2000 options, CBOE Holdings recently announced that it has entered into a licensing agreement to develop and list options based on more than two dozen FTSE and Russell indices. Under the agreement, cash-settled options on these indices will be available to trade in the United States on CBOE. In addition, as part of the agreement, CBOE will collaborate on new index options products and investor education globally.

www.cboe.com/FTSERussell

  1. MANAGING GLOBAL VOLATILITY WITH MSCI OPTIONS

In mid-2014, $3.7 trillion combined assets under management tracked two popular indexes – the MSCI Emerging Markets Index (MXEF) and the MSCI EAFE Index (MXEA), making the indexes two of the most popular gauges of worldwide equity exposure. Several institutional investors have urged CBOE to offer large-sized cash-settled options on MSCI indexes. Options on the MSCI Emerging Markets and EAFE Indexes recently launched on CBOE. Later this year, CBOE also plans to offer options on the MSCI ACWI Index, MSCI USA Index, MSCI World Index and the MSCI ACWI ex-USA Index, subject to regulatory approval.

www.cboe.com/MSCI

  1. RISK MANAGEMENT CONFERENCE (RMC) – AROUND THE WORLD

The CBOE Risk Management Conference is the premier educational forum for users of options and volatility products. While the RMC was held in the U.S. in each of the last 31 years, the year 2015 marks the first time the RMC will be held on three different continents. Here is information on upcoming RMCs –

  • RMC Europe:  Monday-Wednesday, September 28-30, 2015 at the InterContinental Hotel, Geneva
  • RMC Asia: Monday-Tuesday, November 30-December 1, 2015, at the JW Marriott Hotel, Hong Kong
  • RMC US: Monday – Wednesday, February 29 through March 2, 2016 at the Hyatt Regency Coconut Point, FL

www.cboermc.com