Left Tail Risk for CBOE Benchmark Indexes: Nine Histograms

Volatility in the many worldwide markets shot up last week, which has left investors looking for the better ways to manage risk. Some investors still have the misconception that all options strategies are more risky than common stock and bond strategies, but the histogram analysis below shows that nine CBOE benchmark indexes have less left tail risk than the S&P 500® total return index since mid-1986. A total of 9 histograms were created, directly comparing the monthly returns of the PUT, CNDR, BXM, CMBO, CLLZ, BXMD, PPUT, CLL, and BFLY indexes with those of the S&P 500, from July 1986 through May 2016. The percent change of monthly returns was calculated, and the graphs then display the frequency of monthly returns that fall within each of these percent change ranges. The monthly percent changes of the S&P 500 ranged from -21.54% to 13.47%, while the CBOE benchmarks ranged anywhere between -19.58% and 12.6%, with the vast majority of months falling between the 0% to 2% range.

In all cases, there were more months with positive returns than there were with negative returns. Of the 359 months analyzed, the S&P 500 had 231 with positive monthly returns (64.35% of months), while the 9 benchmark indexes had an average of 237 positive monthly returns (66.14% of months). Therefore, theses benchmark indexes were statistically less likely to have a negative return than the S&P 500.

It can also be noted that all 9 of the benchmarks analyzed had fewer monthly returns below -8% than the S&P 500. For example, the BFLY and CLL benchmarks each had only one month that fell in this range, compared to the S&P 500’s 13 months. The histograms below show there was less left tail risk for CBOE benchmark Indexes when compared to the S&P 500.

1. CBOE S&P 500 Iron Butterfly Index (BFLY)

BFLY – CBOE S&P 500 Iron Butterfly Index – tracks 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 money market account invested in one-month Treasury bills, which is rebalanced on the option roll day and is designed to limit the downside return of the index. www.cboe.com/BFLY.
Note that the S&P 500 had 13 declines below -8%, while BFLY had 1.

MM1
2. CBOE S&P 500 95-110 Collar Index (CLL)

CLL – CBOE S&P 500 95-110 Collar Index – purchase stocks in the S&P 500 index, and each month sell SPX call options at 110% of the index value, and each quarter purchase SPX put options at 95% of the index value. www.cboe.com/CLL/.
Note that the S&P 500 had 13 monthly declines below -8%, while CLL had 1.
MM2

3. CBOE S&P 500 5% Put Protection Index (PPUT)

PPUT – CBOE S&P 500 5% Put Protection Index – 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. www.cboe.com/PPUT.
Note that S&P 500 had 13 monthly declines below -8%, while PPUT had 8.
MM3

4. CBOE S&P 500 30-Delta BuyWrite Index (BXMD)

BXMD – CBOE S&P 500 30-Delta BuyWrite Index is designed to track the performance of a hypothetical covered call 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 at 10:00 a.m. CT on the Roll Date. www.cboe.com/BXMD.
Note that the S&P 500 had 13 monthly declines below -8%, while BXMD had 9.
MM4

5. CBOE S&P 500 Zero-Cost Put Spread Collar (CLLZ)

CLLZ – CBOE S&P 500 Zero-Cost Put Spread Collar Index – track the performance of a hypothetical option trading 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 cover the cost of the put spread. www.cboe.com/CLLZ.
Note that the S&P 500 had 13 monthly declines below -8%, while CLLZ had 7.
MM5

6. CBOE S&P 500 Covered Combo Index (CMBO)

CMBO – CBOE S&P 500 Covered Combo Index – track 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 SPX put position is collateralized by a money market account invested in one-month Treasury bills and the 2% OTM SPX call is collateralized by the long S&P 500 Index position. www.cboe.com/CMBO.
Note that the S&P 500 had 13 monthly declines below -8%, while CMBO had 6.
MM6

7. CBOE S&P 500 BuyWrite Index (BXM)

BXM – CBOE S&P 500 Buy Write Index – tracks the performance of a hypothetical option trading strategy that purchases stocks in the S&P 500 index, and each month sell at-the-money (ATM) SPX index call options. www.cboe.comBXM.
Note that S&P 500 had 13 declines below -8%, while BXM had 6.
MM7

8. CBOE S&P 500 Iron Condor (CNDR)

CNDR – CBOE S&P 500 Iron Condor Index – 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 (delta ≈ – 0.2) and a rolling monthly out-of-the-money (OTM) SPX call option (delta ≈ 0.2); 2) buys a rolling monthly OTM SPX put option (delta ≈ – 0.05) and a rolling monthly OTM SPX call option (delta ≈ 0.05) to reduce risk; and 3) holds a money market account invested in one-month Treasury bills, which is rebalanced on option roll days and is designed to limit the downside return of the index. www.cboe.com/CNDR.
Note that the S&P 500 had 13 monthly declines below -8%, while CNDR had 2.
MM8

9. CBOE S&P 500 PutWrite Index (PUT)

PUT – CBOE S&P 500 PutWrite Index – purchase Treasury bills and sell cash-secured at-the-money put options on the S&P 500 index. www.cboe.com/PUT.
Note that the S&P 500 had 13 monthly declines below -8%, while PUT had 8.
MM9