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volatility that was about 30 percent lower than the volatility<br />
of the S&P 500 Index (Figure 8).<br />
Left-Tail Risk. The worst monthly losses over the<br />
26-year time period for the CLL and S&P 500 indexes<br />
were negative 8.6 percent for the CLL Index versus<br />
negative 21.5 percent for the S&P 500 Index (Figure 13).<br />
Monthly Premium In<strong>com</strong>e. The average for the gross monthly<br />
premiums collected by the BXM Index was 1.8 percent and<br />
the index options usually were richly priced (Figures 11 and 12).<br />
Liquidity. The utilization of S&P 500 stocks and S&P 500<br />
index options can provide liquidity and capacity for those<br />
investors who prefer flexible access to their capital (Figure 14).<br />
References<br />
Asset Consulting Group. “An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns,” (January 2012). Available at http://bit.ly/ACG-op-sell<br />
Asset Consulting Group. “Key Tools for Hedging and Tail Risk Management,” (February 2012). Available at http://bit.ly/TailRskACG.<br />
Callan Associates. “An Historical Evaluation of the CBOE S&P 500 BuyWrite Index Strategy,” (October 2006). Available at http://bit.ly/BXM-Call<br />
Cambridge Associates, LLC. “Highlights from the Benefits of Selling Volatility,” (2011). Available at http://bit.ly/CambridgeA-Selling<br />
Chapman, Peter. “Pensions Eye Buy-Writes.” Traders Magazine (December 2011).<br />
Demos, Telis. “In<strong>com</strong>e-generating Funds Find Favour,” Financial Times (January 9, 2012).<br />
EnnisKnupp & Associates. “Evaluating the Performance Characteristics of the CBOE S&P 500 PutWrite Index” (December 2008). Available at http://bit.ly/PUT-Enn.<br />
Feldman, Barry et al. “Passive Options-Based Investment Strategies: The Case of the CBOE S&P 500 BuyWrite Index,” The Journal of Investing (Summer 2005).<br />
Fund Evaluation Group. “Evaluation of BuyWrite and Volatility Indexes: Using the CBOE DJIA BuyWrite Index (BXD) and the CBOE DJIA Volatility Index (VXD) for Asset<br />
Allocation and Diversification Purposes,” (2007). Available at http://bit.ly/BXD-FEG.<br />
Hewitt EnnisKnupp. “The CBOE S&P 500 BuyWrite Index (BXM) – A Review of Performance (2012),” Available at http://bit.ly/HewittEK-BXM<br />
Hill, Joanne et al. “Finding Alpha via Covered Index 2006), Financial Analysts Journal (September.-October2006), pp. 29-46.<br />
Hough, Jack. “Options for Nervous Investors.” Wall Street Journal (Dec. 10, 2011).<br />
Moran, Matthew. “Record-High Correlations Pose Challenges For Modern Portfolio Theory,” The Journal of Indexes (January-February 2010).<br />
———. “Risk-adjusted Performance for Derivatives-based Indexes – Tools to Help Stabilize Returns.” The Journal of Indexes (Fourth Quarter, 2002).<br />
Russell Investments. “Capturing the Volatility Premium through Call Overwriting,” (July 2012). Available at http://bit.ly/Russell-Buy-Write<br />
Schneeweis, Thomas et al. “The Benefits of Index Option-Based Strategies for Institutional Portfolios,” The Journal of Alternative Investments (Spring 2001), pp. 44-52.<br />
Sears, Steven. “Buy-Write Is the Right Buy,” Barron’s (Dec. 31, 2011).<br />
Szado, Edward. “VIX Futures and Options: A Case Study of Portfolio Diversification During the 2008 Financial Crisis.” The Journal of Alternative Investments (Fall 2009), pp. 68-85.<br />
Ungar, Jason et al. “The Cash-secured PutWrite Strategy and Performance of Related Benchmark Indexes.” The Journal of Alternative Investments (Spring 2009).<br />
Whaley, Robert. “Risk and Return of the CBOE BuyWrite Monthly Index” The Journal of Derivatives (Winter 2002), pp. 35-42.<br />
Disclosures<br />
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 (the<br />
“ODD”). The ODD and supporting documentation for claims, <strong>com</strong>parisons, statistics or other technical data in this article are available by calling 1-888-OPTIONS, contacting CBOE at<br />
www.cboe.<strong>com</strong>/Contact, or by visiting www.cboe.<strong>com</strong>. The CBOE S&P 500 BuyWrite Index (BXMSM), BXY Index, CLL Index and PUT Index (the “Indexes”) are designed to represent<br />
proposed hypothetical strategies. Like many passive benchmarks, the Indexes do not take into account significant factors such as transaction costs and taxes. Transaction costs and taxes<br />
for an option-based strategy could be significantly higher than transaction costs for a passive strategy of buying-and-holding stocks. Investors attempting to replicate the Indexes should<br />
discuss with their brokers possible timing and liquidity <strong>issue</strong>s. Past performance does not guarantee future results. Investors should consult their tax advisor as to how taxes affect the<br />
out<strong>com</strong>e of contemplated options transactions. The information in this article is not intended and should not be construed to constitute investment advice or re<strong>com</strong>mendations to purchase<br />
or sell securities. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice.<br />
Endnotes<br />
1 Malkiel, Burton. “What Does the Prudent Investor Do Now?” Wall Street Journal (March 22, 2012).<br />
2 Wirz, Matt. “As Corporate-Bond Yields Sink, Risks for Investors Rise.” www.wsj.<strong>com</strong> (Aug. 14, 2012).<br />
3 29 U.S. Code Section 1104.<br />
4 Highlights of GAO-12-324 “Recent Developments Highlight Challenges of Hedge Fund and Private Equity Investing,” (February 2012) (available at http://www.gao.gov<br />
assets/590/588624.pdf).<br />
5 Williamson, Christine. “Endowment Execs Focus on Liquidity, Volatility in Post-crisis Market,” Pensions & Investments Online (March 7, 2011).<br />
6 Please see www.cboe.<strong>com</strong>/benchmarks for more details and studies on the BXM, BXY, CLL and PUT indexes.<br />
7<br />
See, e.g., Asset Consulting Group. “An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns,” (January 2012); Callan Associates. “An Historical<br />
Evaluation of the CBOE S&P 500 BuyWrite Index Strategy,” (October 2006); Feldman et al. “Passive Options-Based Investment Strategies: The Case of the CBOE S&P 500<br />
BuyWrite Index,” The Journal of Investing, (Summer 2005); Hewitt EnnisKnupp. “The CBOE S&P 500 BuyWrite Index (BXM) – A Review of Performance,” (2012); Hill, Joanne<br />
et al. “Finding Alpha via Covered Index Writing,” Financial Analysts Journal, (September-October 2006), pp. 29-46; Russell Investments. “Capturing the Volatility Premium<br />
through Call Overwriting,” (July 2012); Schneeweis et al. “The Benefits of Index Option-Based Strategies for Institutional Portfolios,” The Journal of Alternative Investments,<br />
(Spring 2001), pp. 44-52.<br />
8 Whaley, Robert. “Risk and Return of the CBOE BuyWrite Monthly Index,” The Journal of Derivatives (Winter 2002) pp. 35-42.<br />
9 See the February 2012 paper by Asset Consulting Group for more details about the indexes and tail-risk management.<br />
www.journalofindexes.<strong>com</strong><br />
November / December 2012<br />
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