In a recent news article in Bloomberg, Callie Bost noted this year’s relatively strong performance for the CBOE S&P 500 BuyWrite Index (BXM), and she wrote —
“Traders Score With Buy-Write Options Strategy Tuned to U.S. Calm. Traders selling calls on stock holdings are beating the S&P 500 for the first time since 2011. The torpor in U.S. equities is proving a bonanza for traders employing an options tactic designed to capitalize on dead markets. … ‘A churning market is the buy-write index’s best friend,’ said Mark Sebastian … ‘The fundamental drivers of buy-write’s underperformance – – Federal Reserve bond-buying and zero interest rate policies -– is coming to an end,’ Nicholas Colas, chief market strategist at Convergex Group LLC, wrote in a note Tuesday. … “
Ms. Bost also noted that the shares outstanding in an ETF designed to track the CBOE BXM Index rose to a record high in May.
CHARTS SHOW STRONG Y-T-D PERFORMANCE FOR BENCHMARKS THAT SELL STOCK INDEX OPTIONS OR VIX FUTURES
Below are three charts showing the year-to-date % changes through July 29 for select total return benchmark indexes. (Total return indexes are pre-tax indexes that take into account reinvested dividends, which can have a significant impact over longer time periods.)
Note that all five of the buywrite indexes in Exhibit 1 had higher returns year-to-date than the four “traditional” indexes in Exhibit 2, and that two of the indexes in Exhibit 2 were down so far this year. Buywrite strategies harvest options premiums and often have the goal of generating returns that are smoother and more consistent than returns of equities and commodities.
Exhibit 3 shows that the CBOE VIX Premium Strategy Index (VPD) rose 13.8% year-to-date. The VPD Index tracks the value of a portfolio that overlays a sequence of short one-month VIX futures on a money market account; the VIX futures are held until expiration and new VIX futures are then sold. Investors who are intrigued by the VPD Index strategy could read the paper by BlackRock – VIX Your Portfolio – Selling Volatility to Improve Performance (June 2013).
This week CBOE launched ten new performance benchmark indexes.To learn more about benchmark indexes that use stock index options or VIX-based products, please visit www.cboe.com/benchmarks, a webpage with links data history and white papers.