Many investors are asking questions about how to protect their investment portfolios in light of a number of developments, including (a) the potential for global trade wars, (2) low interest rates for fixed income investments and high price-earnings ratios for key stocks, and (3) the most severe peak-to-trough drawdowns a decade ago were down 51% for the S&P 500 Index, down 62.7% for the MSCI Emerging Markets Index, and down 81% for the S&P GSCI Index.   

Strategies using S&P 500 options are used by investors for many purposes, including to hedge extreme downside risk and to generate income to help smooth out returns.


The website has some excellent resources regarding getting started in options education and on options strategies.

Three of the simplest SPX strategies that can be used with a goal of reducing portfolio volatility include:

Protective Puts with SPX Options: Purchasing stock index put options permits an investor to hedge equity market risk by limiting downside risk while retaining upside potential.

Buy-write with SPX Options: Buying an S&P 500 stock index portfolio, and "writing" (or selling) the SPX "covered" call option.

Protective Collar with SPX Options: The protective S&P 500 collar strategy provides downside protection through the use of index put options, and finances the purchase of the puts through the sale of short index call options, in effect trading away some upside potential.


S-02-01-P&L diagrams


Most investors try to avoid big drawdowns in their portfolios, but as shown in the drawdowns chart below, four well-known “traditional” indexes all suffered drawdowns of more than 50%. Cboe offers ten strategy benchmark indexes that use SPX options and that now have 32 years of price history. SIX of Cboe’s options-based benchmark indexes are shown in the drawdowns chart, and all six indexes had maximum drawdowns that were less severe than the stock and commodity indexes shown. The worst drawdowns for the six Cboe benchmark indexes ranged from down 38.9% for the PPUT Index to down only 13.7% for the CNDR Index. It is interesting to note that three option-selling indexes (BXM, PUT, and CMBO) all had maximum drawdowns that were less severe than the worst drawdown for the PPUT Index that buys protective puts. Options-selling strategies that receive options premiums could be explored as tools to help in a portfolio protection plan.



Below are descriptions for the six Cboe benchmark indexes shown in chart above.

  • BXM - Cboe S&P 500 BuyWrite Index - tracks the performance of a hypothetical option trading strategy that purchases stocks in the S&P 500 index, and each month sell at-the-money (ATM) SPX index call options
  • CLL - Cboe S&P 500 95-110 Collar Index - purchases stocks in the S&P 500 Index, and each month sell SPX call options at 110% of the index value, and each quarter purchase SPX put options at 95% of the index value
  • CMBO - Cboe S&P 500 Covered Combo Index - tracks a short strangle strategy collateralized by a portfolio holding a long position indexed to the S&P 500 Index and a fixed income account.  The CMBO Index sells a monthly at-the-money (ATM) SPX put option and a monthly 2% out-of-the-money (OTM) SPX call option. The short SPX put position is collateralized by a money market account invested in one-month Treasury bills and the 2% OTM SPX call is collateralized by the long S&P 500 Index position. 
  • CNDR - Cboe S&P 500 Iron Condor Index - tracks the performance of a hypothetical option trading strategy that 1) sells a rolling monthly out-of-the-money (OTM) S&P 500 Index (SPX) put option (delta ≈ - 0.2) and a rolling monthly out-of-the-money (OTM) SPX call option (delta ≈ 0.2); 2) buys a rolling monthly OTM SPX put option (delta ≈ - 0.05) and a rolling monthly OTM SPX call option (delta ≈ 0.05) to reduce risk; and 3) holds a money market account invested in one-month Treasury bills, which is rebalanced on option roll days and is designed to limit the downside return of the index.
  • PPUT - Cboe S&P 500 5% Put Protection Index - strategy that holds a long position indexed to the S&P 500 Index and buys a monthly 5% out-of-the-money (OTM) SPX put option as a hedge.
  • PUT - Cboe S&P 500 PutWrite Index - purchase Treasury bills and sell cash-secured at-the-money put options on the S&P 500 index.


Histograms can be helpful to investors who are analyzing past risks and upside moves.

Over the past 32 years, the Cboe CNDR Index had much less left tail risk  than the S&P 500 Index, as the CNDR had only two months in which it  declined by more than 8%, while the S&P 500 Index had 13 such months.

S-02-03-CNDR Histogram

Over the past 32 years, the Cboe PPUT Index also had less left tail risk than the S&P 500 Index, as the PPUT had 8 months in which it declined by more than 8%.

S-02-04-PPUT Histogram



In their making their asset allocation and diversification decisions, investors often try to assess how an allocation could impact overall portfolio performance. Exhibit 17 of a paper by Callan Associates and Exhibit C of a paper by Asset Consulting Group (see below) both show how the addition of an SPX-options-based strategy can lessen the volatility of a stock portfolio.

S-02-05-adding BXM CLL


To learn more about ways in which S&P 500 options can be used in portfolio management, please visit these links --