[This is the first in a series of nine blogs to be published in early July at the CBOE Options Hub on nine CBOE benchmark indexes which have price histories that begin on June 30, 1986, three decades ago.]
The CBOE S&P 500 PutWrite Index (PUT) –
- is an award-winning benchmark index for a strategy that has grown in popularity over the past decade;
- arguably is the world’s best-known and leading gauge of the cash-secured put-writing strategy;
- has facilitated increased use of cash-secured put option selling by mutual funds and pension funds in recent years;
- measures the performance of a hypothetical portfolio that sells one-month S&P 500 Index (SPX) put options against collateralized cash reserves held in a money market account.
- PERFORMANCE OF PUT INDEX OVER THREE DECADES
As shown in the three charts below, over the past 30 years the PUT Index had higher returns and lower volatility than key benchmark indexes for stocks, Treasury bonds and commodities. In addition, papers by both Bondarenko (2016) and Black and Szado (2016) both have statistics showing superior risk-adjusted returns and lower drawdowns for the PUT Index.
2. GROSS PREMIUMS COLLECTED BY PUT AND WPUT INDEXES
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."
3. LESS LEFT-TAIL RISK FOR PUT INDEX
Note in both of the next two charts that the PUT Index usually had less left tail downside risk when compared to the S&P 500 Index. The PUT Index does have downside risk, but the premiums received can help serve as a cushion in the event of downside equity market moves.
The histogram with the S&P 500 and PUT indexes shows that the S&P 500 had 26 months with declines of worse than six percent, while the PUT Index had only 11 such months. Certain index options strategies can be used to help manage left tail risk.
4. HIGHER RISK-ADJUSTED RETURNS FOR PUT INDEX
Exhibit 19 in a 2016 paper by Professor Oleg Bondarenko found that, over a period of 29½ years, the PUT Index had higher risk-adjusted returns (as measured by the Sharpe Ratio, Sortino Ratio, and Stutzer Index) than the S&P 500, Russell 2000, MSCI World, and Citigroup 30-Year Treasury Bond Indexes. However, please note that many risk-adjusted return metrics assume a normal distribution with no skewness, but there was negative skewness for several indexes, including PUT (-2.09), S&P 500 (-0.79), and Russell 2000 (-0.89).
5. SOURCE OF RETURNS FOR INDEX OPTION SELLERS – RICHLY PRICED INDEX OPTIONS
An inquiring investor might ask – how could the PUT Index have higher returns and lower volatility than traditional indexes over a period of three decades?
A key source of returns for sellers of SPX index options has been the fact that, according to Exhibit 5 in a 2016 paper by Professor Oleg Bondarenko, these options have been richly priced in all the years since 1990 (except in 2008).
6. RESEARCH PAPERS ON PUT INDEX
- Asset Consulting Group. An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns (January 2012)
- BlackRock. VIX Your Portfolio - Selling Volatility to Improve Performance (June 2013)
- 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)
- Bondarenko, Oleg. An Analysis of Index Option Writing with Monthly and Weekly Rollover. (2016)
- Cambridge Associates, LLC. Highlights from the Benefits of Selling Volatility (2011)
- Ennis Knupp & Associates. "Evaluating the Performance Characteristics of the CBOE S&P 500 PutWrite Index" (December 2008)
- Ungar, Jason, and Matthew T. Moran. "The Cash-secured PutWrite Strategy and Performance of Related Benchmark Indexes" The Journal of Alternative Investments - (Spring 2009), pp. 43-56.
7. MORE INFORMATION
The microsite for the PUT Index is at www.cboe.com/PUT.
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).