Index Option Writing And Benchmark Indexes
In light of the four challenges listed above, in the past decade, many investors have explored the potential of using relatively liquid index option-writing strategies in order to add gross income, and to enhance risk-adjusted returns for their portfolios.
In the years 2000 and 2001, some options-based investment managers requested that the Chicago Board Options Exchange (CBOE) create some options-based benchmark indexes, and CBOE did so in subsequent years. The remainder of this paper will analyze the performance of four benchmark indexes that sell one-month, cash-settled S&P 500 (SPX) Index options on the third Friday of every month6 (see Figure 5).
Certain options-based portfolio managers have said that a long-term aspirational goal of the buy-write strategy is to achieve higher "stocklike" returns and lower "bondlike" volatility. Does past performance of options-based benchmark indexes suggest this goal has been achieved at times?
In the time period from June 30, 1986 through July 31, 2012, the PUT Index rose 1,240 percent, the S&P and BXM indexes both rose about 900 percent, and the CLL and MSCI EAFE (in $US) indexes both rose more than 360 percent (see Figure 6). The BXY Index is not included in Figure 6 because its backtested price history begins in mid-1988.
As shown in Figures 7 and 8, over a recent 20-year period, (1) the PUT and BXY indexes both had higher returns and lower volatility than the S&P 500, MSCI EAFE and S&P GSCI indexes; and (2) three options-based indexes (PUT, BXM and CLL) had less volatility than the Treasury bond index and the two stock indexes. Figure 9 shows the risk-adjusted returns and other statistics for the four options-based indexes highlighted in this article as compared with other widely referenced benchmarks.
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