A recent piece in the Wall Street Journal noted that –
“The yield on the benchmark 10-year U.S. Treasury note fell to its lowest level ever Tuesday, a new milestone in a three-decade downward run that even veteran traders never thought would go so far or last so long. The yield closed below 1.4% for the first time … according to data going back to 1977. The question now is how low can they go. Investors buying Treasurys now are taking big risks, as prices of longer-term debt can move significantly if interest rates unexpectedly rise. …”
As shown in the first two charts below, both the dividend yields on the S&P 500 Index and the interest rates on the Ten-Year US Treasury Notes are much lower than they were two and three decades ago.
EXPLORE CBOE BENCHMARK INDEXES FOR HIGHER GROSS PREMIUMS
Certain CBOE benchmark indexes write index options every month or every week in order to generate option premium on a regular basis. I am writing a series of nine blogs that are being published in early July at the CBOE Options Hub on nine CBOE benchmark indexes which have price histories that begin on June 30, 1986.
Since mid-1988 the average of the gross monthly premiums captured by CBOE S&P 500 BuyWrite Index (BXM) has been about 1.7%.
In Exhibit 8 in a 2016 paper, Professor Oleg Bondarenko wrote “From 2006 to 2015, the average annual premium for PUT is 24.1% and for WPUT is 39.3%. …. Note: While the gross premiums collected are always positive, the cash-secured put-writing strategy does have downside risk and its net returns can be negative.”
RISK AND RETURN FOR OPTION-WRTING BENCHMARKS OVER 30 YEARS
The two charts below show comparative three-decade performance for eight indexes, including three CBOE option-writing benchmarks – PUT, BXM, and BXMD, and also for one CBOE option-buying benchmark – PPUT. Note that the BXMD and PUT indexes had the highest returns of all the eight indexes, while the PUT and BXM indexes had the lowest volatility of the eight indexes.
While past performance is not predictive of future returns, in today’s environment of low yields on “traditional” investments, I believe that the research papers and benchmark indexes at www.cboe.com/benchmarks are worth exploring.