In 2011 I received an email from an experienced options manager that stated —
“The introduction of BXM by the CBOE and the exchange’s continued support has created a new covered call asset class that fits well into the move to lower volatility equity products. BXM gives us a much better accepted benchmark than is available in the Low Vol equity world. We have been getting a lot interest, RFP’s etc. as consultants and institutional investors accept the notion of lower volatility equity products that match or exceed unhedged equity returns with less risk. One thing that would help in BXM replication strategies would by the acceptance of PUT as an identical, but operationally superior replication method. The problem is that some people are having difficulty in not owning stock. An education effort to show that Put/Call parity is not a theoretical concept but a real world truth would allow easy to implement BXM replication strategies using only puts and treasuries. …”
I replied to the manager that I spoke with some CBOE colleagues, and that there is general agreement that BXM Index and buy-write strategies generally were more well-known and accepted than put-write strategies in 2011, but that CBOE would provide more information and education on the put-write strategy and the PUT Index in the future.
MORE INTEREST IN PUT-WRITING IN 2016
In 2016 we are seeing evidence of more interest in put-writing strategies by individual and institutional investors, pension funds and ETF providers.
CBOE now offers four benchmark indexes that engage in the cash-secured put-write strategy –
- CBOE S&P 500 PutWrite Index (PUT)
- CBOE S&P 500 One-Week PutWrite Index (WPUT)
- CBOE Russell 2000 PutWrite Index (PUTR)
- CBOE Russell 2000 One-Week PutWrite Index (WPTR)
The website www.cboe.com/benchmarks has links to the four indexes above (three of which were launched in the past year), and also to the three new academic studies below —
- Bondarenko, Oleg. An Analysis of Index Option Writing with Monthly and Weekly Rollover. (2016)
- Black, Keith, and Edward Szado. Performance Analysis of CBOE S&P 500 Options-Selling Indices. (2016)
- Shore, Mark. Analyzing Russell 2000 Options-Based Benchmark Indexes Designed to Provide Enhanced Yields and Risk-Adjusted Returns. (2016)
HIGHER RISK-ADJUSTED RETURNS FOR PUTWRITE INDEXES
All three of the studies above (a) provided charts and/or tables that showed a number of metrics (including annualized returns, standard deviations maximum drawdowns and skew), and (2) showed that CBOE’s PutWrite indexes have had strong risk-adjusted returns (see below).
Exhibit 19 of the paper by Oleg Bondarenko showed that, since mid-1986, the PUT Index had stronger risk-adjusted returns (as measured by the Sharpe Ratio, Sortino Ratio, and Stutzer Index) than three stock indexes and a Treasury bond index. Note that, because of negative skewness, the Stutzer Index was lower than the Sharpe Ratio for both the PUT and S&P 500® indexes.
Exhibit 7 of the 2016 paper by Keith Black and Ed Szado showed that the PUT Index had higher risk-adjusted returns (as measured by (as measured by the Sharpe Ratio, Sortino Ratio, M2 and Stutzer Index) than nine other indexes.
Exhibit 16 of the paper by Mark Shore showed that the CBOE Russell 2000 PutWrite Index (PUTR) had a higher Sharpe Ratio (but lower Sortino Ratio) than the Russell 2000 Index since 2001. The findings of the Mark Shore paper are significant in that they show that evidence to suggest that the put-writing strategy had strong returns when applied to use of Russell 2000 options (the other two studies found strong risk-adjusted returns for the PUT Index, which sells S&P 500 (SPX) options.
Past performance for all indexes is not predictive of future returns. For more information on benchmark indexes and studies on put-writing (including studies by BlackRock and by EnnisKnupp), please visit www.cboe.com/benchmarks.