Options study benchmarks strategies to indexes

The following is a CBOE press release...

CHICAGO, Feb. 14, 2012 /PRNewswire/ -- The merits of using options-based strategy benchmark indexes to construct a diversified portfolio is the subject of a new study -- "An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns" — released today by investment-advisory firm Asset Consulting Group.

The study, commissioned by Chicago Board Options Exchange (CBOE), evaluates the performance of four key options strategy benchmark indexes: the CBOE S&P 500 BuyWrite Index (BXM), CBOE S&P 500 PutWrite Index (PUT), CBOE S&P 500 2% OTM BuyWrite Index (BXY) and CBOE S&P 500 95-110 Collar Index (CLL) against more "traditional" stock and bond indexes.

The study provides an assessment of options-based strategy benchmark index performance over a 25-year period. It highlights key benchmark index effectiveness in helping to generate income and limit volatility exposure in various market environments, including periods marked by flat stock market performance, low interest rates and recurring market volatility.

Highlights of the Study:

  • Index Growth: Based on one dollar invested on June 30, 1986, index growth through December 31, 2011 was: 1153 percent for the PUT Index, 830 percent for the BXM Index, 807 percent for the S&P 500 Index, and 368 percent for the CLL Index.
  • Lower Volatility: PUT, BXM and CLL indexes each exhibited volatility that was about 30 percent lower than S&P 500 Index volatility. BXY exhibited volatility that was about 17 percent lower than the S&P 500 Index.
  • Left Tail Risk: While investors are primarily focused on returns, in recent years many investors also have become as concerned about mitigating the risk of large portfolio losses, also known as "tail risk." The study showed that over the past 25 years, the worst monthly loss for the S&P 500 Index was a decline of 21.5 percent, compared to a relatively modest 8.6-percent monthly decline for the CLL Index.
  • Monthly Premium Income: The BXM Index collected high gross monthly premiums — 1.8 percent per month on average — attractive income in a low-yielding interest rate environment.

Overview of Strategy Benchmarks:

  • CBOE S&P 500 BuyWrite Index (BXM) is based on buying an S&P 500 Index portfolio and selling the near-term S&P 500 at-the-money "covered" call options and holding the options position until it is cash-settled at expiration, at which time a new one-month at-the-money call is sold.
  • CBOE S&P 500 PutWrite Index (PUT) is based on selling a near-term fully cash-secured S&P 500 at-the-money put option that is cash settled and re-written (sold) on the third Friday of the following contract month.
  • CBOE S&P 500 2% OTM BuyWrite Index (BXY) is identical methodology as the BXM, except that the monthly S&P 500 near-term calls are sold at 2% out-of-the-money.
  • CBOE S&P 500 95-110 Collar Index (CLL) is based on buying an S&P 500 stock index portfolio, buying a three-month S&P 500 put at 95 percent of the S&P 500 value and selling a one-month S&P 500 call at 110 percent of the S&P 500 value. The calls are re-sold monthly, and the puts are repurchased every three months. The "collar" implies that both the potential profit and loss is limited ("collared").

The Asset Consulting Group study covered time periods through the end of 2011. As an update, BXM, BXY and PUT all reached their all-time-high daily closing prices yesterday. On February 13, BXM closed at 882.50, BXY closed at 1112.71, and PUT closed at 1159.81.

In its continuing efforts to provide education for institutional investors, CBOE and S&P Indices provided funding for this study. The full Asset Consulting Group study, as well as a complete listing of CBOE's previously commissioned options-based strategy studies, can be found at www.cboe.com/benchmarks.

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