Q - 1. Why was the CBOE S&P 500 BuyWrite Index (BXM) created?
A - 1. Around the year 2000, the Chicago Board Options Exchange (CBOE) received general interest from institutional and individual customers in having the Exchange create a benchmark index to measure the performance of certain stock and options strategies. The CBOE believes that the introduction of the BXM index could lead to more long-term customer interest in and use of CBOE index options.
Q - 2. Which organization has created and updated the BXM Index?
A - 2. The BXM Index was developed by the CBOE in cooperation with Standard & Poor's. To help in the development of the BXM Index, the CBOE commissioned Professor Robert Whaley (then of Duke University) to compile and analyze relevant data from the time period from June 1988 through December 2001. Data on daily BXM prices now is available from June 30, 1986, to the present time. The CBOE has a business relationship with Standard & Poor's on the BXM. The CBOE is responsible for the daily updating of the BXM Index. The CBOE has filed for patent protection for the methodology of the BXM Index.
Q - 3. What time period is covered by the BXM Index?
A - 3. Daily prices are provided in an historical return series for the BXM Index beginning June 30, 1986 up through the present time. The daily prices are available at www.cboe.com/bxm, and from Bloomberg and other quote vendors that provide options data.
Q - 4. What is the price level of BXM?
A - 4. The BXM daily prices are available at www.cboe.com/bxm, and from quote vendors that provide options data. The price level of BXM was 92.21 on June 30, 1986, and was set to 100 on June 1, 1988, the first day that Standard and Poor's began reporting the daily cash dividends for the S&P 500 index portfolio. As of year-end 2006, the BXM Index price had risen more than 700%, to a price level of 800.16.
Q - 5. How is the BXM Index calculated?
A - 5. The BXM is a passive total return index based on selling the near-term, near-the-money S&P 500 Index (SPXsm) call option against the S&P 500 stock index portfolio each month. The SPX call that is sold (or written) will have approximately one month remaining to expiration, with an exercise price just above the prevailing index level (i.e., slightly out of the money). The premium collected from the sale of the call is added to the portfolio's total value. The SPX call is held until its expiration, at which time a new one-month, near-the-money call is written. The expired option, if exercised, is settled in cash. Click here for more details about the methodology for the BXM Index. Investors attempting to replicate the BXM Index should discuss with their brokers possible timing and liquidity issues.
Q - 6. How often is the BXM Index calculated and disseminated?
A - 6. The BXM Index is calculated in real-time by the CBOE every fifteen seconds during each trading day, except that on the third Friday "roll dates," the BXM Index generally begins its fifteen-second updates in the afternoon.
Q - 7. Can an investor gain exposure to BXM through tradable, investable instruments?
A - 7. Here is a three-part answer to this question: In March 2002 the CBOE began disseminating BXM prices as a general indication of a hypothetical S&P 500 buy-write strategy.
The CBOE does not provide specific recommendations for investment funds, but interested investors might explore the possibility of doing some research on the returns and risks of investment funds that engage in covered call writing for at least a portion of their investment portfolios. Reports indicate that there now are investment products designed to track the BXM Index, including a structured product, closed-end fund, exchange-traded note (ETN), and exchange traded fund (ETF). Experienced investors also could ask their brokers about the possibility of directly engaging in an S&P 500 buy-write strategy by investing in stocks and SPX options.
As always, investors interested in this and other buy-write strategies should consult with their brokers and legal advisors for applicable advice on relevant issues, including but not limited to. considerations regarding margin requirements. For more information about margin requirements, please see CBOE Rule 12.3, CBOE Regulatory Circular RG99-09, and the CBOE web site at www.cboe.com/margin. In addition, please see Regulatory Circular RG02-46 -- "Time at Which Expiring AM-Settled Index Options are Considered Exercised, Assigned or Purged."
Q - 8. How has the BXM performed in different types of market environments?
A - 8. The added income from the covered calls in a BXM position often has provided a cushion in times of flat to declining markets. On the other hand, in times when the stock market was rising rapidly, SPX buy-write strategies generally underperformed the S&P 500. Please see the charts, tables and publications at this website www.cboe.com/bxm for more specific information on returns and risks. CBOE members and member firms desiring to market the BXM Index and/or the BXM returns to current or potential customers should please note that they are subject to the detailed requirements of CBOE Rule 9.21 - "Communications to Customers."
Q - 9. What type of volatility has the BXM had in past years?
A - 9. A potentially attractive feature to some investors has been the relative steadiness and low volatility of BXM returns; from June 1988 through December 2006, the annualized standard deviation of returns was 13.8% for the S&P 500 and 9.2% for BXM.
Q - 10. What are the risks of engaging in a strategy designed to track BXM?
A - 10. It is expected that buy-write positions generally will have lower returns than stocks in times of rising stock markets. A covered call writer does not participate in upside stock gains beyond the strike price plus the premium received. In addressing issues regarding writing covered calls using index options, CBOE Regulatory Circular RG99-09 provides in part that: "As a reminder, it is important to understand that due to the cash settlement feature of SPX® options and the "timing risk" involved, there is an inherent limitation on the ability of writers of SPX® options to cover the risk exposure by holding positions in SPDRS®." Commissions, taxes, market impact costs and other transaction costs will reduce returns so that an investor might find it difficult to match BXM returns. 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. Past performance does not guarantee future results.
Q - 11. Are commissions and other transaction costs included in BXM, and are the BXM results achievable by individual and institutional investors?
A - 11. Like many passive indexes, the BXM 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. The BXM Index is designed to represent general trends for a hypothetical buy-write strategy. Prior to 2003, the BXM methodology used an assumption that the SPX options were sold at the bid price (rather than the mid-point of the bid-ask). Transaction costs for a buy-write strategy such as the BXM could be significantly higher than transaction costs for a passive strategy of buying-and-holding stocks.