New Benchmark Indexes – CNDR, BFLY, PPUT, VSTG, et al. – for Enhanced Yield, Reduced Risk, or Capturing of Alpha

On Monday, September 28 at the Fourth Annual CBOE Risk Management Conference (RMC) Europe http://www.cboermceurope.com, a presentation on new CBOE strategy benchmark indexes that use index options was delivered by William Speth, Vice President, Research and Product Development, CBOE. (In 2002 CBOE introduced the first major option-based strategy benchmark index – the CBOE S&P 500 BuyWrite Index (BXM)). Names, tickers and descriptions for many of the new benchmark indexes are at the bottom of this Blog.

Mr. Speth noted that CBOE’s benchmark indexes often engage in systematic use of options to achieve an investment objective, and that the objective could be enhanced yield, reduced risk, or the capturing of alpha.

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PERFORMANCE SINCE MID-1986

Six of the new indexes have data history dating back to June 30, 1986, and the two figures below both provide analyses of performance since mid-1986.  The first chart below shows three of CBOE’s recently introduced 10 new strategy benchmark indexes – BXMD, CMBO, and CNDR.

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In the period from mid-1986 through August 31, 2015, the CBOE S&P 500 30-Delta BuyWrite Index (BXMD) had relatively strong performance – the BXMD rose 1792% and had an annualized return of 10.5% and an annualized standard deviation of 13.1%. One contributing factor to the strong risk-adjusted performance of the BXMD, PUT, BXY (and other benchmarks sell SPX options) is the fact that SPX options usually have been richly priced over the past 29 years, with implied volatility being higher than realized volatility. Note that past performance is not predictive of future returns.

DESCRIPTIONS OF TEN OF THE NEW BENCHMARK INDEXES

Below are descriptions and the dates for data history for ten of the new strategy benchmark indexes.

1.  CBOE S&P 500 Multi-Week BuyWrite Index (BXMW) – June, 2012 – Present
The CBOE S&P 500 Multi-Week BuyWrite Index is designed to track the performance of a weekly covered call strategy with staggered short positions in call options expiring in consecutive four week options.  The BXMW Index is constructed as a combined portfolio of four mini BuyWrite indexes.  Expirations are staggered so that the BXMW Index sells four-week options on a rolling weekly basis.

2.      CBOE S&P 500 One-Week PutWrite Index (WPUT) – January, 2006 – Present
The CBOE S&P 500 One-Week PutWrite Index is designed to track the performance of a strategy that sells an at-the-money (ATM) S&P 500 Index (SPX) put option on a weekly basis. The maturity of the written SPX put option is always one week to expiry. The written SPX put option is fully collateralized by a money market account.

3.      CBOE S&P 500 Zero-Cost Put Spread Collar Index (CLLZ) – June, 1986 – Present
The CBOE S&P 500 Zero-Cost Put Spread Collar Index is designed to track the performance of a low volatility strategy that 1) holds a long position indexed to the S&P 500 Index; 2) on a monthly basis buys a 2.5% – 5% S&P 500 Index (SPX) put option spread; and 3) sells a monthly out-of-the-money (OTM) SPX call option to fully cover the cost of the put spread.

4.      CBOE S&P 500 Iron Condor Index (CNDR) – June, 1986 – Present
The CBOE S&P 500 Iron Condor Index is designed to track the performance of a hypothetical option trading strategy that 1) sells a rolling monthly out-of-the-money (OTM) S&P 500 Index (SPX) put option and a rolling monthly out-of-the-money (OTM) SPX call option; 2) buys a rolling monthly OTM SPX put option and a rolling monthly OTM SPX call option to reduce risk; and 3) holds a fixed income account which is rebalanced on option roll days to limit the downside return of the index.

5.      CBOE S&P 500 Iron Butterfly Index (BFLY) – June, 1986 – Present
The CBOE S&P 500 Iron Butterfly Index is designed to track the performance of a hypothetical option trading strategy that 1) sells a rolling monthly at-the-money (ATM) S&P 500 Index (SPX) put and call option; 2) buys a rolling monthly 5% out-of-the-money (OTM) SPX put and call option to reduce risk; and 3) holds a fixed income account which is rebalanced on the option roll day to limit the downside return of the index.

6.      CBOE VIX Strangle Index (VSTG) – June, 2006 – Present
The CBOE VIX Strangle Index is designed as a premium capture index. The index overlays short CBOE Volatility Index (VIX) call and put options with a capped long VIX call option position. The position is collateralized by fixing the number of strangles such that 80% of capital is reserved.

7.      CBOE S&P 500 Covered Combo Index (CMBO) – June, 1986 – Present
The CBOE S&P 500 Covered Combo Index is designed to track the performance of a “short strangle” strategy collateralized by a portfolio holding a long position indexed to the S&P 500 Index and a fixed income account.  The CMBO Index sells a monthly at-the-money (ATM) S&P 500 Index (SPX) put option and a monthly 2% out-of-the-money (OTM) SPX call option. The short put position is fully collateralized by the money market account and the 2% OTM SPX call is collateralized by the long SPX Index position.

8.      CBOE S&P 500 5% Put Protection Index (PPUT) – June, 1986 – Present
The CBOE S&P 500 5% Put Protection Index is designed to track the performance of a strategy that holds a long position indexed to the S&P 500 Index and buys a monthly 5% out-of-the-money (OTM) S&P 500 Index (SPX) put option as a hedge.

9.      CBOE S&P 500 30-Delta BuyWrite Index (BXMD) – June, 1986 – Present
The CBOE S&P 500 30-Delta BuyWrite Index is designed to track the performance of a yield-enhancement strategy that holds a long position indexed to the S&P 500 Index and sells a monthly out-of-the-money (OTM) S&P 500 Index (SPX) call option. The call option written is the strike nearest to the 30 Delta at10:00 a.m. CT on the Roll Date.  The BXMD Index rolls on a monthly basis, typically every third Friday of the month.

10.     CBOE S&P 500 Conditional BuyWrite Index (BXMC) – June, 1990 – Present
The CBOE S&P 500 Conditional BuyWrite Index is designed to track the performance of a yield-enhancement strategy that holds a long position indexed to the S&P 500 Index and sells a monthly at-the-money (ATM) S&P 500 Index (SPX) call option. The written number of ATM call options will be either ½ unit or 1 unit and will be determined by the level of the CBOE Volatility Index (VIX Index) when the call option is written on the Roll Date.  The BXMC Index rolls on a monthly basis, typically every third Friday of the month.

MORE INFORMATION

To learn more about more than 20 CBOE strategy benchmark indexes and see key related White Papers, please visit www.cboe.com/benchmarks. White Papers at that page discuss the volatility risk premium – index options often have been richly priced.

To learn more about CBOE’s annual Risk Management Conferences, please visit www.cboermc.com