When I worked at investment conferences around the year 2000 and asked attendees about use of listed options, many attendees would say they did not use listed options for a variety of reasons, including perceptions that options were too risky, too complex, too labor-intensive, and/or not well understood. Since the 2002 launch of the Cboe BXM Index, there has been a tremendous increase in interest in and use of listed options by individual and institutional investors, and there now are more packaged options-based products with less volatility than related stock index products. Average daily volume for Cboe’s S&P 500® options grew from 92,421 in 2000 to 1.44 million in the first half of 2018, and the number of ’40 Act funds using listed options grew from 10 funds in 2000 to 157 funds in 2017, according to the 2018 study of options-based funds by Keith Black and Professor Ed Szado.
What developments have facilitated this more-than-tenfold growth in SPX options volume and in options-based funds? Key developments that facilitated this growth include:
- the launch of Cboe strategy benchmark indexes (including the BXM, BXY, PUT, and BXMD indexes), and
- the publishing of research papers related to the Cboe benchmark indexes by Duke University, Ibbotson, Callan, Cambridge, Wilshire, Blackrock, Aon Hewitt, and other firms.
TESTIMONIAL ON BXM BENCHMARK INDEX AND RESEARCH PAPERS
Ron Egalka of Egalka Consulting (and founder of Rampart Investment Management, a firm which in 2003 secured the first license to use the BXM Index), recently noted --
“As I review my 45 years specializing in hedged equity investments, I recall a number of key inflection points that have influenced and advanced the growth in the listed options space, depicted most recently in the new 2018 study by Black and Szado, “Performance Analysis of Option-Based Equity Mutual Funds, CEFs and ETFs. An Update”. These events include: the development of several option valuation models, precipitated by the Black Scholes Model in 1973; a few US Tax Reform Acts, a variety of option-based studies; numerous conferences that extended both the science and art in the use of options; the creation of index and sub-index options, and others. Perhaps the single most pivotal and impactful of these was the creation of the CBOE S&P 500 BuyWrite Index, or “BXM”. Clearly, from a scientific and marketing standpoint, there was a need for a benchmark by which all option strategies could be compared. There have been a number of studies, none more important to BXM’s initial acceptance than Ibbotson’s seminal “Case Study on BXM Buy-Write Options Strategy” (2004). Using Rampart Investment Management’s actual transactions across a number of BXM accounts, Ibbotson proved the real-world efficacy of the BXM and added to the “legitimacy” of options as a replicateable equity strategy. The introduction of the BXM combined with the Ibbotson and other studies spawned a dramatic growth in privately and publicly available vehicles using option strategies which used the BXM as their benchmark. Some $30-billion in new options-based, closed-end funds were brought to market between 2004 and 2007. As a long-term participant in the options-based space, I’m pleased to see the growth has continued, based on the 2018 Black and Szado study.”
12 KEY NEWS CLIPS AND ENHANCED INTEREST IN OPTIONS-BASED STRATGIES
The introduction of the BXM Index in 2002 and of other benchmark indexes and related white papers facilitated tremendous growth in interest in and use of SPX options-based strategies. Below are excerpts from 12 of the key news clips that discussed the Cboe strategy benchmark indexes:
- Pensions & Investments. (Sept. 20, 2004) "Covered Call Strategy Could Have Helped, Study Shows … Institutional investors could have notched a 12.4% return and simultaneously reduced risk over the past 16 years if they had added a covered call strategy overlay to their portfolios, according to a study by Ibbotson Associates in Chicago…. ”
- Financial Times. (Oct. 11, 2004) Schurr, Stephen "Spoilt for Choice? Time to Explore Your Options. ... While investors have increasingly used Buy-Write strategies for individual stocks, applying this approach to index investing can reap attractive rewards with relatively little risk. A research report by Ibbotson Associates, the asset allocation experts from Chicago, has good things to say about the Buy-Write options strategy when it comes to S&P 500 index investing.. ..."
- Barron's. (Oct. 25, 2004) "Yield Boost -- Firms Market Covered-call Writing to Up Returns." "... According to a recent Ibbotson Associates study, a covered call-writing benchmark, the Chicago Board Options Exchange Buy-Write Index, or BXM, produced a compound annual return of 12.39% over 16 years -- compared with 12.20% for the Standard & Poor's 500 stock index. The BXM also was more stable, experiencing two-thirds the volatility of the S&P 500.... ."
- Worth Magazine, (April 2005) "An Array of Options - A Buy-write Strategy Can Add Some Octane to Portfolios When the Markets Lack Direction ... participants in the options markets have consistently overestimated implied volatility, according to Ibbotson’s study …”
- Pensions & Investments. (May 16, 2005) “Buy Writing Makes Comeback as Way to Hedge Risk. … Pension executives are once again beginning to consider a long-standing but long-dormant derivatives strategy - covered call writing, or buy writing - to hedge their downside equity risk and add incremental alpha ... While options industry executives said the strategy is not new, two developments have given it more credibility. First, in 2002, the Chicago Board Options Exchange created a buy-write index based on the S&P 500, the CBOE S&P 500 BuyWrite Index, or BXM. ... Second, and possible more important for institutional investors, Ibbotson Associates, Chicago, released a report …’The frequency of calls requesting information has been going up more steadily since last fall, and that’s been precipitated to a large extent by the publication of Ibbotson’s white paper,’” … “
- New York Times (Oct. 15, 2006). ““Buy-Write Funds: A Blast From the Industry’s Past. … A 2004 study by Ibbotson Associates in Chicago found that, for 16 years starting in the late 1980’s, a covered-call portfolio would have slightly beaten the S.& P. 500, while its returns would have zigzagged less. Ibbotson’s report gave the strategy a boost, as did the creation in 2002 of a covered-call index by the Chicago Board Options Exchange. …”
- Barron’s. “Buy Stocks, Not Indexes. (Dec. 26, 2005) “… As of Friday's close, the BXM was up 5.25% for the year, while the S&P was up 4.68%. That's not exactly a whopping gain, but it looks much better when you consider that, according to a 2004 study by Ibbotson Associates, the BXM carries about one-third less risk than the S&P 500. …”
- SmartMoney (November 29, 2006). “The BuyWrite Stuff. … The merits of the buy-write strategy, and also the index, are the subject of a growing body of research, including a new report recently prepared by Callan Associates, an investment-services consulting firm that the CBOE hired to evaluate the CBOE S&P 500 BuyWrite Index in comparison to the S&P 500 Index. The Callan survey, which evaluated the BXM and S&P 500 from June 1, 1988, to Aug. 31, 2006, revealed some interesting facts that deserve serious consideration by investors. According to the survey: BXM's return was comparable to the S&P 500, yet only had about two-thirds of the risk … The results of the Callan survey are important findings, not only for options traders, but for anyone who's concerned with better navigating the financial market.” … “
- Pensions & Investments. (February 19, 2007). “Wall Street spreading the word on options Derivative instruments now being pushed as source of better returns, not just for hedging. … Mr. Egalka cited the seminal impact of a 2004 research paper issued by Chicago-based Ibbotson Associates about the comparable performance of the CBOE S&P 500 Buy-Write Index vs. the S&P 500 index itself, but with two-thirds less volatility than the traditional S&P index.
- Wall Street Journal. (April 20, 2009) “Buy-Write: Safe Harbor in Troubled Times? A covered call strategy may bring long-term in returns with minimal turmoil, Is it possible to get decent long-term investment returns without going through all this turmoil? Some experts say there is -- and recent events, perhaps surprisingly, back them up. Seven years ago [Cboe] launched an index to track the performance of a so-called S&P 500 "buy-write" or "covered call" strategy. … Studies conducted for the CBOE by derivatives expert Robert Whaley (now a professor at Vanderbilt), and investment research firms Ibbotson Associates and Callan Associates appear to bear this out. They used public data on share prices and options to backdate the new index to 1988. Callan, in 2006, concluded that the strategy ‘has generated superior risk-adjusted returns over the last 18 years… generating a return comparable to that of the S&P 500 at approximately two-thirds of the risk.’ … “
- Pensions & Investments. “Investors turn to options to hold gains while trimming losses (September 7, 2009) … For example, according to a study by Callan Associates Inc., the Chicago Board Options Exchange S&P 500 BuyWrite index, an index designed to track the performance of a hypothetical call-writing strategy, gained 26.6% in 1997 compared with 33.4% for the S&P 500 itself. … “
- Pensions & Investments. (Oct. 3, 2016) “Funds go exotic with put-write options to stem volatility …In its paper, Wilshire noted that the CBOE S&P 500 put-write index, with an annualized 10.1% return, outperformed the CBOE S&P 500 buy-write index's 8.9% and the S&P 500 stock index's 9.9% over 30 years ended Dec. 31. …”
PUBLISHED PAPERS IN JOURNALS THAT COVER CBOE BENCHMARK INDEXES
Multiple papers published in journals have covered Cboe’s benchmark indexes such as the BXM or PUT indexes, and these papers have facilitated enhanced understanding of and interest in options-based strategies for enhanced portfolio performance. The five papers listed below have generated an aggregate of more than 170 citations, according to Google Scholar analysis.
- Feldman, Barry, and Dhruv Roy, "Passive Options-Based Investment Strategies: The Case of the Cboe S&P 500 BuyWrite Index." The Journal of Investing. (Summer 2005).
- He, Donald, Jason Hsu and Neil Rue. “Option-Writing Strategies in Low-Volatility Framework.” The Journal of Investing. (Fall 2015).
- Israelov, Roni and Lars Nielsen. “Covered Calls Uncovered.” Financial Analysts Journal. (Nov./Dec. 2015).
- Ungar, Jason, and Matthew T. Moran. “The Cash-secured PutWrite Strategy and Performance of Related Benchmark Indexes.” The Journal of Alternative Investments. (Spring 2009).
- Whaley, Robert. "Risk and Return of the Cboe BuyWrite Monthly Index" The Journal of Derivatives. (Winter 2002), pp. 35-42.
LINKS TO 13 KEY WHITE PAPERS
In addition to the journal papers listed above, below are links to 13 more white papers that cover Cboe benchmark indexes that use SPX options.
- 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)
- Asset Consulting Group. Key Tools for Hedging and Tail Risk Management (February 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)
- Callan Associates. "An Historical Evaluation of the CBOE S&P 500 BuyWrite Index Strategy." (October 2006)
- Cambridge Associates. 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)
- Hewitt EnnisKnupp. "The CBOE S&P 500 BuyWrite Index (BXM) - A Review of Performance" (2012)
- Ibbotson Associates. "Highlights from Case Study on BXM Buy-Write Options Strategy." (2004)
- Parametric Portfolio Associates. "Volatility Risk Premium and Financial Distress" (August 2016)
- Wilshire Three Decades of Options-Based Benchmark Indices with Premium Selling or Buying: A Performance Analysis (2016).
This month more blogs re: Cboe’s SPX-related benchmark indexes are being 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 –