Here are some highlights from recent news stories on the bond markets –
- A Wall Street Journal story had the headline “Government Bond Rout Deepens on Trump’s Economic Plans,”
- A Barron’s story noted that Jeffrey Gundlach, CEO of DoubleLine Capital, sees “a rise in bond yields that could lift the yield on the 10-year Treasury note to 6% in the next four or five years.”
- A New York Times story stated that “From Indonesia to the United States, government bonds are undergoing a sharp sell-off as investors — large sovereign wealth funds and hedge funds, as well as the accounts of American retirees — restructure investment portfolios to try to capture the fruits of what they expect will be a free-spending Trump presidency.”
- A CNBC headline – “'Trump Thump' Whacks Bond Market for $1 Trillion Loss.”
I recently spoke with several investors and advisors who are interested in yield-oriented investments that have the potential for positive returns in a rising interest rate environment, and there appears to be increased interest in CBOE’s option-selling benchmark indexes, such as BXM, PUT, BXR, and WPUT. www.cboe.com/benchmarks.
2016 CHARTS ON YIELD-ORIENTED INVESTMENTS
While many of the recent stories on the bond markets provide data and charts on rising interest rates, a key question for investors is – how have yield-oriented indexes and investments recently performed?
The first two charts below show comparative performance since mid-2016 for select CBOE option-writing benchmark indexes versus select fixed-income benchmark indexes.
In the chart above the percentage changes since mid-year (through November 14) were up 7% for the PUTR Index, up 4% for the PUT Index, and down 13% for Citigroup’s 30-year U.S. Treasury Bond Index. In addition, Citigroup’s 30-year U.S. Treasury Bond Index had a 17% drawdown from its July 8 peak through November 14.
In the chart below the percentage changes since mid-year (through November 14) were up 9% for the BXRD Index, up 3% for the BXMD Index, and down 5% for the Bloomberg Barclays Global Aggregate Index. It is possible that indexes related to the Russell 2000 Index recently have done relatively well in part because the Russell 200 stocks tend to focus more on U.S. (rather than multi-national) markets.
The chart below shows a drop in prices for the iShares 20+ Year Treasury Bond ETF (TLT) from 143.6 on July 8 to 121.31 on November 14. (This chart reflects daily closing prices, but does not show total returns with reinvested dividends).
PERFORMANCE OVER MORE THAN THREE DECADES
The next two bar charts show the performance of four of CBOE’s option-writing indexes (BXM, BXMD, CMBO, and PUT) versus four “traditional indexes” since mid-1986. PUT and BXMD were the top performers on the Annualized Returns chart, while three of the CBOE indexes (PUT, BXM and CMBO) all had less volatility than the Treasury bond and stock indexes.
I been asked about these types of charts – How can the CBOE indexes have higher returns and lower volatility? Is the performance too good to be realistic? In my answers to these types of questions, I often note that the option-selling indexes have received options premiums at regular intervals, and that there generally has been an index options “volatility risk premium” by which the index options usually have been richly priced. One also might note that since mid-1986 a CBOE option-buying index, the CBOE S&P 500 5% Put Protection Index (PPUT) had annualized returns of 6.5% (lower than the annualized returns for all four option-selling indexes in the chart above).
GROSS PREMIUMS GENERATED BY OPTION-SELLING BENCHMARK INDEXES
As shown in the chart below, the aggregate gross premiums in 2015 (as a percentage of the underlying value) were 39.9% for the CBOE S&P 500 One-Week PutWrite Index (WPUT) (which receives SPX options premium 52 times a year), and 20.1% for the CBOE S&P 500 PutWrite Index (PUT) (which receives SPX options premium 12 times a year).
Both the chart above and the chart below are excerpted from a paper by Professor Oleg Bondarenko, An Analysis of Index Option Writing with Monthly and Weekly Rollover. (2016).
VOLATILITY RISK PREMIUM – RICHLY PRICED INDEX OPTIONS
The chart below shows that the S&P 500 (SPX) options were richly priced every year since 1990 (except in 2008). This fact could have been helpful to sellers of index options.
RESEARCH PAPERS AND MORE INFORMATION
To learn more about CBOE benchmark indexes and the volatility risk premium, please visit www.cboe.com/benchmarks and click on the research papers below.
• Aon Hewitt. Harvesting the Equity Insurance Risk Premium: Know Your Options (December 2014)
• 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 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)
• Fund Evaluation Group (FEG). Evaluating Options For Enhanced Risk-Adjusted Returns: CBOE Russell 2000 Option Benchmark Suite and Case Studies on Fund Use of Options (2016).
• Wilshire. Three Decades of Options-Based Benchmark Indices with Premium Selling or Buying: A Performance Analysis (2016).
Qualified institutional investors also are welcome to register at www.cboermc.com for an upcoming Risk Management Conference hosted by CBOE –
* RMC Asia 2016: Nov 30 – Dec 1, 2016 at the Conrad Hong Kong Admiralty, Hong Kong
* RMC US 2017: Wednesday – Friday, March 8 – 10, 2017 at the St. Regis Monarch Beach, Dana Point, California.