Cboe S&P 500 Dividend Aristocrat Target Income Index


The Cboe S&P 500 Dividend Aristocrat Target Income Index (the "SPAI Index") is part of the family of Target Outcome Indices. The Index is a benchmark index designed to track the performance of a hypothetical buy-write strategy on constituents of the S&P 500 Dividend Aristocrat Index1. The S&P 500 Dividend Aristocrat Index, constructed and maintained by S&P Dow Jones Indices LLC, targets companies that are currently members of the S&P 500® Index, have increased dividend payments each year for at least 25 years, and meet certain market capitalization and liquidity requirements.

The SPAI Index is designed with the primary goal of generating an annualized level of income that is approximately 3.5% over the annual dividend yield of the S&P 500® Index and a secondary goal of generating price returns that are proportional to the price appreciation of the S&P 500 Index. The SPAI Index investment strategy includes (1) buying the stocks contained in the S&P 500 Dividend Aristocrat Index, and (2) partially “writing” (or selling) weekly “covered” call options on each stock, generally on the last trading day of each week. The number of call options overwritten per unit of stock exposure is varied periodically with the goal of generating a total yield from dividends and call option premiums that is 3.5% per annum higher than the yield from dividends of the S&P 500 Index. The percentage of each stock that is overwritten with call options will by design be always less than 20%.

Target Outcome Returns

The Index is part of the family of Target Outcome Indexes. Many investments target speculative returns, with uncertain levels of risk, over an uncertain period of time. While opportunistic, this approach to investing brings a high degree of uncertainty. Target Outcome Indexes encourage targeting a specific defined return or "payoff", with an allowance for a specific defined risk, at a specific point in time in the future.

Variable Overwrite Methodology

The SPAI Index follows a variable overwrite methodology. The methodology varies the percentage of the stock portfolio that is overwritten each week with the goal of converting the potential outperformance of the stock portfolio over a benchmark and converting that outperformance into premium income through use of options. This is typically achieved by targeting a premium income level and varying the overwrite periodically to meet that income level.

1. See methodology for the S&P 500 Dividend Aristocrats Index at http://us.spindices.com/documents/methodologies/methodology-sp-500-dividend-aristocrats.pdf.

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