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CBOE Releases New Study on Options-Based Strategies

Posted: February 26, 2016 | by: Thomas F. McKeon, CFA

Performance Analysis of CBOE S&P 500 Options-Selling Indices reaches familiar conclusion: better returns, less risk or both.

From Matt Moran at the CBOE:
A new study examines six benchmark indexes that write S&P 500® (SPX) index options, comparing their performances with those of traditional stock, bond and commodity benchmark indexes. The study, “Performance Analysis of CBOE S&P 500 Options-Selling Indices,” is the first comprehensive study that examines the performance of options-strategy benchmark indexes that incorporate iron condor and iron butterfly strategies.


Commissioned by CBOE and co-authored by Keith Black, Ph.D., CAIA, CFA, managing director of the Chartered Alternative Investment Analyst Association, and Edward Szado, Ph.D., CFA., assistant professor of finance at Providence College and director of research at the Institute for Global Asset and Risk Management (INGARM), the study analyzed benchmark index performances for the 29½-year period from mid-1986 to the end of 2015. The options-based benchmarks studied were the CBOE S&P 500 BuyWrite Index (BXM); CBOE S&P 500 PutWrite Index (PUT); CBOE S&P 500 Iron Butterfly Index (BFLY); CBOE S&P 500 30-Delta BuyWrite Index (BXMD); CBOE S&P 500 Covered Combo Index (CMBO); and CBOE S&P 500 Iron Condor Index (CNDR).


Summary of Results
The study provides an analysis of 29.5 years of performance (from mid- 1986 through the end of 2015) for six Options-selling indices and for stock, bond and commodity indices. Key findings of the new study include:


The Options-selling indices had generally similar returns as the S&P 500® Index with much lower volatility and lower maximum drawdowns. The Options-selling indices had higher risk-adjusted returns, as measured by the Sharpe Ratio, Sortino Ratio, and Stutzer Index.


The Options-selling indices exhibited less tail risk with lower likelihood of large losses and lower likelihood of large gains than the S&P 500.


Options-selling indices tend to have relatively low betas ranging from 0.13 to 0.82 and have positive alphas.


Both the CBOE S&P 500 PutWrite Index (PUT) and the CBOE S&P 500 30-Delta BuyWrite Index (BXMD) had higher returns and lower volatility than the S&P 500 Index. A key source of strong risk-adjusted returns has been the fact that the index options usually have been richly priced.

Over a period of more than 8 years, the index that sells SPX put options once a week (WPUT Index) generated gross monthly premiums that in aggregate were about 8% higher for a rolling six-month period than the index that sells SPX put options once a month (PUT Index).


The average daily notional value for volume on the S&P 500 options rose to more than $190 billion in 2015.


You can download the study here: Performance Analysis of CBOE S&P 500 Options-Selling Indices


The risk-return scatterplot will look familiar to any investment professional. In a low-yield fixed income environment and a low-expected return equity environment, these simple options-selling strategies that all take advantage of the positive expected return from the short volatility exposure, are very attractive.

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