Cboe Global Markets

Benchmark Indices Series: Income Generation and Smoother Returns with Cboe’s BXM, BXMD, PUT and CMBO Indices

Matt Moran
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July 20, 2021

This article is part of our three-part series: “How to Utilize Cboe’s S&P 500 Index Options Benchmark Indices,” which highlights the hedging, income-generation and spread strategies investors may explore, with analysis of more than 35 years of data history of Cboe’s benchmark indices. Read part one, “Hedging Downside Exposure with PPUT, CLL and CLLZ Indices.”

In recent years, the yields on both stocks and bonds reached relatively low levels, and U.S. stock market volatility (as measured by the Cboe Volatility Index® (VIX® Index)) hit a record daily closing high of 82.69. Risk-averse investors in search of investments that generate income, offer smoother returns and have the potential to generate relatively strong risk-adjusted returns in this type of market environment may find utility in strategies that include the covered writing or selling of S&P 500® Index (SPX) options. 

Option-Writing Cboe Benchmark Indices

The four Cboe benchmark indices listed below sell SPX options and help investors assess how hypothetical options strategies performed in various market regimes over the past 35 years.

Each of the benchmark indices engages in the covered selling of SPX options every month in order to receive options premium, which can act as a cushion in times of falling stock markets. Additionally, the premiums may potentially help the Cboe benchmark indices deliver lower standard deviations and less severe drawdowns than the S&P 500 Index. However, the strategy may not participate in some or all of the upside moves in the stock index, and the S&P 500 Index has often outgained the covered option writing indices during bull markets.

Use of SPX Options

The four benchmark indices highlighted in this article sell SPX options, making the popularity of the options an important factor in the utility of the strategies. In the second quarter of 2021, the average daily volume in notional terms for the large-sized, cash-settled SPX options (including SPX Weeklys) topped $500 billion. The average daily open interest was 14.4 million contracts for the SPX options, and 400,511 for the Mini-SPX options (XSPSM).

Key Metrics for Option-Writing Indices

In comparison to four comparable benchmark indices, Cboe’s option-writing benchmark indices offer lower standard deviations, less severe maximum drawdowns, higher risk-adjusted returns, higher annualized returns and lower betas.

  • Lower Standard Deviations: All four Cboe indices had lower standard deviations than the other analyzed stock and commodity indices.
  • Less Severe Maximum Drawdowns: All four Cboe indices had less severe maximum drawdowns than the other analyzed stock and commodity indices.
  • Risk-Adjusted Returns: The BXMD, PUT and CMBO Indices had higher risk-adjusted returns (as measured by the Sharpe and Sortino Ratios) than the other five indices.
  • Annualized Returns: The annualized returns of the four Cboe benchmark indices were higher than those of the MSCI EAFE Index (USD), the 30-Year U.S. Treasury Bond Index (FTSE) and the S&P GSCI, but less than that of the S&P 500 Index. The Shiller Cyclically Adjusted PE Ratio (CAPE Ratio) for the S&P 500 Index reached 38 in July 2021, which is more than twice its long-term average of 18, and some analysts are skeptical of the current lofty level of the S&P 500 Index.
  • Lower Betas: The four Cboe indices had betas to the S&P 500 Index that ranged from 0.57 to 0.82, indicating that they may have the potential to help diversify certain portfolios.

Strong Risk-Adjusted Returns

Over the past 35 years, three of the option-writing indices – PUT, BXMD and CMBO – had higher risk-adjusted returns (as measured by the Sortino Ratio) than five other key indices. 

Premiums Generated by ATM and OTM Option-Writing Indices

There is a cost-benefit trade-off for ATM and OTM option-writing strategies. While an ATM strategy can often generate more premium, it foregoes participation in the upside moves of the stocks. Alternatively, OTM option-writing strategies often can have stronger upside moves than ATM option-writing strategies during bull markets.

Since May 2006, the Cboe S&P 500 BuyWrite Index (BXM), which writes at-the-money SPX options, has generated, on average, a 1.7% gross premium each month. The Cboe S&P 500 2% OTM BuyWrite Index (BXYSM), which sells OTM options, has generated, on average, a 0.9% gross premium each month.

Histogram and Tail Risk Management with ATM and OTM Option-Writing Indices

ATM and OTM option-writing strategies may be particularly attractive to risk-averse investors who would like to have a cushion in the event of big downside moves during bear markets. As illustrated in the chart below, there is decreased left-tail downside tail risk and more right-side upside potential for the BXM Index, which writes ATM SPX options. The chart also shows that the BXMD Index generates less premium than the BXM Index, but the BXMD Index has more potential to participate in some of the upside moves for the S&P 500 Index during a bull market.  

Monthly Returns Since July 1986

The BXM, BXMD, PUT and CMBO indices may be a smart choice for risk-averse investors who are interested in strategies that offer income generation, smoother returns and stronger risk-adjusted returns.

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Raj Shah, a summer 2021 intern, contributed to this report.

The information in this article is provided for general education and information purposes only. No statement(s) within this article should be construed as a recommendation to buy or sell a security or to provide investment advice. Supporting documentation for any claims, comparisons, statistics or other technical data in this article is available by contacting Cboe Global Markets at www.cboe.com/Contact. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of “Characteristics and Risks of Standardized Options.” Copies are available from your broker or from The Options Clearing Corporation at 125 South Franklin Street, Suite 1200, Chicago, IL 60606 or at www.theocc.com. Past Performance is not indicative of future results. Cboe is a registered trademark of Cboe Exchange, Inc. All other trademarks and service marks are property of their respective owners. © 2021 Cboe Exchange, Inc. All Rights Reserved.

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