Cboe SMILE Index
The Cboe SMILE Index tracks the value of a portfolio of securities (SMILE portfolio) that uses the information inherent in the skew of options on S&P 500 options (SPX options to capture a volatility premium. The SMILE portfolio is composed of an investment in one-month Treasury bills of a short position in a 30-delta put option on the S&P 500 Index (SPX put), and a position in a 30-delta SPX call. The position in the call is long or short depending on whether the ratio of the premia of the 30-delta put and 30 delta call is smaller than or greater than 1.5. This ratio is a measure of the skew of S&P 500 options. The SMILE Index thus alternates between a short 30-delta SPX strangle and a 30-delta SPX risk reversal spread, conditional on skew.
The SMILE portfolio is rebalanced monthly, typically on the third Friday of the month, when SPX options expire.