The loss-floor mechanism allows for those positions that could cause more drag on performance to be allocated to cash, and without significant lag. It sometimes is the case with sharp moves in SPY that the entire index spends some time during the expiration cycle allocated completely to the cash proxy, but as mentioned earlier, the cash proxy weight is reallocated to new spread pairs in the next rebalance cycle. The example given represents one period and is unique, meaning it will not always be the case that a -2.21 percent move in SPY will result in 27 spread pairs being reallocated to the cash proxy, or more generically, that an aggregate move of X percent in the underlying will always result in a particular action occurring in the index.
Unlike other options strategy indexes, these indexes solely include options contracts and do not contain any underlying security as a component. In designing these indexes, we realized that investors looking for option-overlay products wanted just that—an option overlay. It did not make sense to force investors to double-up on the existing underlying stock positions or have to incur transaction costs or create taxable events in order to get exposure to these strategies.
Figure 7 shows some periodic returns of each of the indexes as compared with the underlying (SPY) for each calendar year since the indexes’ inception. Figure 8 shows the historical trend lines for the indexes versus SPY. While the indexes’ base dates are both Jan. 21, 2005, the indexes commenced operation on Sept. 16, 2011, and all prior index levels are backtested. As component selection for these indexes is a purely quantitative process, there should be no concerns regarding survivorship bias or other forms of "cherry-picking" that could influence any backtested results. The base date of Jan. 21, 2005 was chosen as it was the date that ISE and the other U.S. options exchanges first listed options contracts on SPY.
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