More Discussion of Buy-Write Strategies and the BXN 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 year-end price for many stock indexes fell three years in a row, but Buy-Writes tended to underperform stocks in the late 1990s bull market. 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. In 2004 the Ibbotson Associates consulting firm did a case study on buy-write strategies.
The CBOE NASDAQ-100 BuyWrite Index (BXN) is a benchmark index designed to track the performance of a hypothetical buy-write strategy on the NASDAQ-100. The BXN is a passive total return index based on (1) buying a NASDAQ-100 stock index portfolio, and (2) "writing" (or selling) the near-term NASDAQ-100 (NDX) Index "covered" call option, generally on the third Friday of each month. The NDX 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 NDX call is held until expiration and cash settled, at which time a new one-month, near-the-money call is written. Data on daily BXN prices is available from December 30, 1994, to the present from options price quote vendors and at www.cboe.com/BXN (see the link to spreadsheet above).