The CBOE DJIA BuyWrite Index (BXD) is a benchmark index that measures the performance of a theoretical portfolio that sells DJX call options, against a portfolio of the stocks included in the Dow Jones Industrial AverageSM (the Dow). A "buy-write," also called a covered call, generally is considered to be an investment strategy in which an investor buys a stock or a basket of stocks, and also sells call options that correspond to the stock or basket of stocks. This strategy can be used to enhance portfolio returns and reduce volatility.
Consultant's Study on the CBOE DJIA BuyWrite Index (BXD)
In 2007 the Fund Evaluation Group (FEG) issued a new study entitled "Evaluation of BuyWrite and Volatility Indexes—Using the CBOE DJIA BuyWrite Index (BXD) and the CBOE DJIA Volatility Index (VXD) for Asset Allocation and Diversification Purposes." The paper studied the 109-month period from October 1997 to November 2006. The FEG study presented several findings on the 9-year performance of the BXD Index, including:
Diversification and Reduced Volatility. The volatility of the BXD was 25% less than that of the DJIA and 46% lower than the Russell 2000. The study found that if an investor had allocated 25% of an otherwise all-stock portfolio to the BXD, the portfolio volatility would have declined by about 9%.
Income Generation. Selling index options 12 times per year can produce significant income. Over the 109-month period studied, the average monthly options premium received was 1.84%, or an annualized rate of 24.46%.
Improved Risk-Adjusted Returns. Incorporating a 10% allocation to the BXD could have improved the risk-adjusted returns (as measured by the Sharpe Ratio) of all four comparative portfolios studied (i.e., all-stocks, all fixed income, aggressive and conservative portfolios).
Click here for a link to the study.
Links to More Information on the BXD Index
News Release - Study Issued by Fund Evaluation Group on The CBOE DJIA BuyWrite Index (BXD), CBOE DJIA Volatility Index (VXD), and Impact on Risk-Adjusted Returns
News Release - CBOE To Begin Disseminating Two New Indexes Based On The Dow Jones Industrial Average: CBOE DJIA Volatility Index and CBOE DJIA BuyWrite Index
BXD Daily Price History (.csv format)
More Discussion of Buy-Write Strategies and the BXD Index
Buy-Write strategies provide option premium income that can help cushion downside moves in an equity portfolio, but Buy-Writes often under perform stocks in rising markets. Thus, some Buy-Write strategies significantly outperformed stocks in 2000 - 2002 when the DJIA year-end price fell three years in a row, but Buy-Writes tended to underperform stocks in the late 1990s when the DJIA rose by more than 15% per year. Buy-Write strategies have an added attraction to some investors in that Buy-Writes can help lessen the overall volatility in many portfolios.
In 2002 the Chicago Board Options Exchange (CBOE) commissioned Professor Robert Whaley to develop the methodology for a benchmark index designed to reflect buy-write performance
The CBOE DJIA BuyWrite Index (BXD) is a benchmark index designed to track the performance of a hypothetical buy-write strategy on the DJIA. Announced in 2005, the BXD Index was created by CBOE under an agreement with Dow Jones & Company, Inc., and is based on prices of Options on the Dow (DJX), traded at CBOE. The BXD is a passive total return index based on (1) buying a DJIA stock index portfolio, and (2) "writing" (or selling) the near-term DJX Index "covered" call option, generally on the third Friday of each month. The DJX call written will have about one month remaining to expiration, with an exercise price just above the prevailing index level (i.e., slightly out of the money). The DJX call is held until expiration and cash settled, at which time a new one-month, near-the-money call is written. Data on daily BXM prices is available from October 16, 1997 to the present from options price quote vendors and at www.cboe.com/bxd (see the link Excel spreadsheet above).
Please click on any of the following for more information:
CBOE Press Release on BXD/VXD Study Dated March 2, 2007
BXD Methodology (in PDF)
Covered Call Strategy with Equity Options
BXD Roll Information
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. CBOE® and Chicago Board Options Exchange® are registered trademarks of Chicago Board Options Exchange, Incorporated.
The Dow Jones Industrial AverageSM is a product of Dow Jones Indexes, a licensed trademark of CME Group Index Services LLC ("CME"), and has been licensed for use. "Dow Jones®", "Dow Jones Industrial AverageSM", "DJIASM" and "Dow Jones Indexes" are service marks of Dow Jones Trademark Holdings, LLC ("Dow Jones"), have been licensed to CME and have been sublicensed for use for certain purposes by Chicago Board Options Exchange, Incorporated ("CBOE"). Financial products based on the CBOE DJIA BuyWrite Index are not sponsored, endorsed, sold or promoted by Dow Jones, CME or their respective affiliates and none of them makes any representation regarding the advisability of investing in such product(s). The CBOE DJIA BuyWrite Index may be covered by one or more patents or pending patent applications. Supporting documentation for claims, comparisons, recommendations, statistics or other technical data is available by calling 1-888-OPTIONS, sending an e-mail to firstname.lastname@example.org, or by visiting www.cboe.com/BXD. This document contains comparisons, assertions, and conclusions regarding the performance of index based on backtesting, i.e., calculations of how the index might have performed in the past if it had existed. Backtested performance information is purely hypothetical and is provided in this document solely for informational purposes. Backtested performance does not represent actual performance, and should not be interpreted as an indication of actual performance. Like many passive indexes, the BXD Index does not take into account significant factors such as transaction costs and taxes and, because of factors such as these, many or most investors should be expected to underperform passive indexes. Investors attempting to replicate the BXD Index should discusswith their brokers possible timing and liquidity issues. Past performance is not indicative of future results. The methodology for the BXD Index is subject to change.