In the May 7, 2016, Striking Price column in Barron’s, Steve Sears wrote —
“…THE OPTIONS INDUSTRY has taken a major step onto Main Street. Morningstar, which millions of individuals rely upon to evaluate mutual funds, has created a category for options-trading funds. The significance of this can’t be overstated. It indicates options have become part of the mainstream investment landscape, like growth mutual funds and index funds. … Morningstar’s “options writing” category is limited to mutual funds that use options as a central and consistent part of their strategy. The funds sell puts, or calls against long stock, and may also use spreads and collars.”
In 2002 CBOE introduced the CBOE S&P 500 BuyWrite Index (BXM) as the first major benchmark index for options strategies, and over the past dozen years the BXM has facilitated increased and new uses of option by mutual funds, closed–end funds and pension funds. The BXM is a passive total return index based on (1) buying an S&P 500® stock index portfolio, and (2) “writing” (or selling) the one-month S&P 500 Index (SPX) “covered” call option, generally on the third Friday of each month.
The first chart below shows that over the past three decades the BXM Index had less volatility than the 30-Year Treasury Bond Index and three other major indexes.
The BXM Index sells SPX covered call options that are close to at-the-money (ATM). With the ATM covered call strategy, and investor can collect quite a bit of gross options premium, but the investor forgoes the upside move on the stock position. The chart below shows that the S&P 500 grew faster than the BXM Index in recent years.
VOLATILITY RISK PREMIUM
A key source of strong-risk-adjusted returns for sellers of SPX index options has been the fact that, according to the chart below, these options have been richly priced in all the years since 1998 (except in 2008).
LESS LEFT TAIL RISK
The histogram with the S&P 500 and BXM indexes shows that the S&P 500 had 26 months with declines of worse than six percent, while the BXM Index had 12 such months. Certain index options strategies can be used to help manage left tail risk.
The table below shows that, for the 5 months in which the S&P 500 Index dropped by more than 10%, the BXM Index experienced drops that were not as severe as those of the S&P 500.
CBOE-COMMISSIONED RESEARCH PAPERS THAT COVER THE BXM INDEX
CBOE commissioned the 8 following papers to provide analyses of the BXM index by third-party experts.
- Asset Consulting Group. An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns (January 2012)
- Black, Keith and Edward Szado. Performance Analysis of Options-Based Equity Mutual Funds, CEFs, and ETFs (Jan. 2015) – Slide Presentation (30-page PDF), Highlights (4-page PDF), and Paper (28-page PDF)
- Black, Keith, and Edward Szado. Performance Analysis of CBOE S&P 500 Options-Selling Indices. (2016)
- Callan Associates. “An Historical Evaluation of the CBOE S&P 500 BuyWrite Index Strategy.” (October 2006)
- Feldman, Barry, and Dhruv Roy, “Passive Options-Based Investment Strategies: The Case of the CBOE S&P 500 BuyWrite Index.” The Journal of Investing. (Summer 2005)
- Hewitt EnnisKnupp. The CBOE S&P 500 BuyWrite Index (BXM) – A Review of Performance (2012)
- Ibbotson Associates. “Highlights from Case Study on BXM Buy-Write Options Strategy.” (2004)
- Whaley, Robert. “Risk and Return of the CBOE BuyWrite Monthly Index” The Journal of Derivatives (Winter 2002), pp. 35-42.
The microsite for the BXM Index is www.cboe.com/BXM.
For more information on dozens of CBOE benchmark indexes, please visit www.cboe.com/benchmarks for research papers and price charts.
If you would like to hear expert speakers discuss options and volatility, please visit www.cboermc.com to learn more about these upcoming CBOE Risk Management Conferences —
- RMC EUROPE 2016, Sept. 26 – 28, 2016, Powerscourt Hotel, County Wicklow, Ireland
- RMC ASIA 2016, Nov 30 – Dec 1, 2016, Conrad Hong Kong Admiralty, Hong Kong
- RMC US 2017, March 8 – 10, 2017, St. Regis Monarch Beach, Dana Point, California
(The author thanks Paige Stodden for her assistance in creating charts for this Blog).