This is the 4th in a series of blogs at www.cboe.com/blogs to commemorate the 35th anniversary of the launch of SPX options on July 1, 1983. #SPX35

In 2001 some portfolio managers who engaged in strategies that used S&P 500® (SPX) options told me that pension fund sponsors suggested that the options industry should develop indexes that could serve as benchmarks for options-based performance. In 2002 Cboe worked with Professor Robert Whaley to introduce the first major benchmark index that uses listed options: the Cboe S&P 500 BuyWrite Index (BXM).  In this blog I am pleased to provide an update regarding the performance of ten SPX-options-based strategy benchmark indexes that have 32 years of price history. 

S-04-01-Benchmarks32Years-Logo

RETURNS AND VOLATILITY FOR KEY BENCHMARK INDEXES OVER 32 YEARS

As shown in the chart below, over a 32-year period, all four of the shown Cboe benchmark indexes that use SPX options – BXMD, PUT, BXM, and PPUT – had lower volatility than the stock and commodity indexes in the chart. In addition, the BXMD and PUT had higher returns when compared to most of the other indexes on the chart.

S-04-02-Eff Frontier 11 benchmark indexes

GROWTH OVER 32 YEARS

Over the 32-year time period since mid-1986, the Cboe S&P 500 30-Delta BuyWrite Index (BXMD) rose more (and had lower volatility) than the S&P 500, MSCI EAFE and S&P GSCI indexes. The BXMD Index writes out-of-the-money SPX options and in the bull market of recent years, the captured more upside than the BXM and PUT indexes that write at-the-money SPX options. 

S-04-03-BXMD Line graph

RETURNS AND VOLATILITY OVER 32 YEARS

The two bar charts below show relatively strong performance for certain options-based benchmark indexes over 32 years. In the left-side chart showing annualized returns, eight of the top nine indexes are options-based indexes, while in the right-side chart, the nine indexes with the lowest standard deviations all were options-based benchmark indexes.

S-04-04-Returns and Standard Deviations

LOW BETAS FOR CBOE’S BFLY AND CNDR INDEXES OVER 32 YEARS

Column 2 of the table below shows the betas for 12 indexes over 32 years. The betas for the 9 Cboe options-based indexes ranged from a low of 0.11 for the Cboe BFLY Index to a high of 0.82 for the Cboe BXMD Index. The Wikipedia writeup on beta states that – “A beta below 1 can indicate either an investment with lower volatility than the market, or a volatile investment whose price movements are not highly correlated with the market.”

Column 3 of the table below shows the R-squared values over 32 years.  The R-squared values for the 9 Cboe options-based indexes ranged from a low of 2.6% for the Cboe BFLY Index to a high of 92.1% for the Cboe CLLZ Index. Morningstar provides this description – “An R-squared of 100 indicates that all movements of a portfolio can be explained by movements in the benchmark. … Conversely, a low R-squared indicates that very few of the portfolio's movements can be explained by movements in its benchmark index.”

S-04-05-Beta & R-squared 
The table above provides evidence to suggest that some of the Cboe options-based benchmark indexes have had somewhat independent and less volatile price movements, and the Cboe indexes could be explored by investors who are trying to manage risk and diversify their portfolios.


HIGHER RISK-ADJUSTED RETURNS FOR PUT, BXMD, AND CMBO INDEXES

In assessing investment performance of various benchmarks and securities, investors often look to risk-adjusted return measures such as the Sharpe Ratio and Sortino Ratio. The next table below shows that Cboe’s PUT, BXMD and CMBO indexes all had higher Sharpe Ratios and Sortino Ratios than the S&P 500, MSCI EAFE and S&P GSCI indexes. The Morningstar website states that: (1) The Sharpe ratio is found by dividing a fund's annualized excess returns over the risk-free rate by its annualized standard deviation, and (2) The Sortino ratio is the excess return over the risk-free rate divided by the downside semi-variance.

In assessing measures of risk-adjusted returns, expert analysts often also look at the skewness and kurtosis of return distributions.                                        

S-04-06-Risk-adjusted

DESCRIPTIONS OF CBOE BENCHMARK INDEXES

Below are descriptions for Cboe benchmark indexes -

  • BFLY - Cboe S&P 500 Iron Butterfly Index - tracks 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, which is rebalanced on the option roll day and is designed to limit the downside return of the index.
  • BXMD - Cboe S&P 500 30-Delta BuyWrite Index - tracks the performance of a hypothetical covered call strategy that holds a long position indexed to the S&P 500 Index and sells a monthly out-of-the-money (OTM) S&P 500 Index (SPX) call option. The call option written is the strike nearest to the 30 Delta at 10:00 a.m. CT on the roll date.
  • 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.
  • CLLZ - Cboe S&P 500 Zero-Cost Put Spread Collar Index - tracks the performance of a hypothetical option trading strategy that 1) holds a long position indexed to the S&P 500 Index; 2) on a monthly basis buys a 2.5% - 5% S&P 500 Index (SPX) put option spread; and 3) sells a monthly out-of-the-money (OTM) SPX call option to cover the cost of the put spread. 
  • 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 - purchases Treasury bills and sells cash-secured at-the-money put options on the S&P 500 index.
  • RXM - Cboe S&P 500 Risk Reversal Index - tracks the performance of a hypothetical risk reversal strategy that: (1) buys a rolling out-of-the-money (delta ≈ 0.25) monthly SPX Call option; (2) sells a rolling out-of-the-money (delta ≈ - 0.25) monthly SPX Put option; and (3) holds a rolling money market account invested in one-month Treasury bills to cover the liability from the short SPX Put option position.



MORE INFORMATION

In upcoming weeks more blogs re: Cboe’s SPX-related benchmark indexes will be posted at www.cboe.com/blogs.

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