Higher Returns and Lower Volatility for BXMD and PUT Indexes Over 30½ Years

Investors now have access to price histories for several CBOE benchmark indexes that date back 30.5 years. The first two charts below show that since mid-1986 both the CBOE S&P 500 30-Delta BuyWrite Index (BXMDSM) and CBOE S&P 500 PutWrite Index (PUTSM) had higher returns than the S&P 500® Index, 30-Year Treasury Bond Index (Citi), MSCI EAFE® Index, and S&P GSCI Index.


The Annualized Returns and Standard Deviations bar graphs below show that, for example, the CBOE S&P 500 PutWrite Index (PUT) had higher returns and lower volatility than the stock and commodity indexes and the CBOE S&P 500 5% Put Protection Index (PPUT). Why did the PUT Index have higher returns and lower volatility than these indexes? One possible explanation for the relatively strong performance of the PUT Index is the fact that the index sells S&P 500 (SPX) options every month (while the PPUT Index buys SPX options), and SPX options usually have been richly priced in recent years, according to Exhibit 8 in a 2016 paper by Wilshire Associates at www.cboe.com/wilshire.


A 18-page mid-2016 paper by Fund Evaluation Group at www.cboe.com/FEG found (1) there is a volatility risk premium for options on the Russell 2000 (RUT) Index, and that the CBOE Russell 2000 PutWrite Index (PUTR) had relatively strong returns and risk-adjusted returns. The line chart below shows the returns for the PUTR Index that writes RUT put options once a month, the WPUT Index that writes SPX options every week, and the VSTG Index, which overlays short VIX calls and cuts with a capped long VIX call position.


The two charts below show histograms for 366 months of returns for the S&P 500, BXM, and the CBOE S&P 500 Iron Butterfly Index (BFLY), which 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 money market account invested in one-month Treasury bills. Since mid-1986 the number of months during which the index had losses of worse than down 6% were –

*   26 months for the S&P 500 Index,
*   12 months for the BXM Index, and
*   Only 2 months for the BFLY Index.

Both the Standard Deviations and the Histogram charts above show that certain hypothetical options stratgies have had less volatility and downside risk than the S&P 500 Index.


For links to more information on CBOE benchmark indexes and releated whie papers and charts, please visit www.cboe.com/benchmarks.