volatility that was about 30 percent lower than the volatility of the S&P 500 Index (Figure 8). Left-Tail Risk. The worst monthly losses over the 26-year time period for the CLL and S&P 500 indexes were negative 8.6 percent for the CLL Index versus negative 21.5 percent for the S&P 500 Index (Figure 13). Monthly Premium In<strong>com</strong>e. The average for the gross monthly premiums collected by the BXM Index was 1.8 percent and the index options usually were richly priced (Figures 11 and 12). Liquidity. The utilization of S&P 500 stocks and S&P 500 index options can provide liquidity and capacity for those investors who prefer flexible access to their capital (Figure 14). References 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 Asset Consulting Group. “Key Tools for Hedging and Tail Risk Management,” (February 2012). Available at http://bit.ly/TailRskACG. Callan Associates. “An Historical Evaluation of the CBOE S&P 500 BuyWrite Index Strategy,” (October 2006). Available at http://bit.ly/BXM-Call Cambridge Associates, LLC. “Highlights from the Benefits of Selling Volatility,” (2011). Available at http://bit.ly/CambridgeA-Selling Chapman, Peter. “Pensions Eye Buy-Writes.” Traders Magazine (December 2011). Demos, Telis. “In<strong>com</strong>e-generating Funds Find Favour,” Financial Times (January 9, 2012). EnnisKnupp & Associates. “Evaluating the Performance Characteristics of the CBOE S&P 500 PutWrite Index” (December 2008). Available at http://bit.ly/PUT-Enn. 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). 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 Allocation and Diversification Purposes,” (2007). Available at http://bit.ly/BXD-FEG. Hewitt EnnisKnupp. “The CBOE S&P 500 BuyWrite Index (BXM) – A Review of Performance (2012),” Available at http://bit.ly/HewittEK-BXM Hill, Joanne et al. “Finding Alpha via Covered Index 2006), Financial Analysts Journal (September.-October2006), pp. 29-46. Hough, Jack. “Options for Nervous Investors.” Wall Street Journal (Dec. 10, 2011). Moran, Matthew. “Record-High Correlations Pose Challenges For Modern Portfolio Theory,” The Journal of Indexes (January-February 2010). ———. “Risk-adjusted Performance for Derivatives-based Indexes – Tools to Help Stabilize Returns.” The Journal of Indexes (Fourth Quarter, 2002). Russell Investments. “Capturing the Volatility Premium through Call Overwriting,” (July 2012). Available at http://bit.ly/Russell-Buy-Write Schneeweis, Thomas et al. “The Benefits of Index Option-Based Strategies for Institutional Portfolios,” The Journal of Alternative Investments (Spring 2001), pp. 44-52. Sears, Steven. “Buy-Write Is the Right Buy,” Barron’s (Dec. 31, 2011). 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. Ungar, Jason et al. “The Cash-secured PutWrite Strategy and Performance of Related Benchmark Indexes.” The Journal of Alternative Investments (Spring 2009). Whaley, Robert. “Risk and Return of the CBOE BuyWrite Monthly Index” The Journal of Derivatives (Winter 2002), pp. 35-42. Disclosures 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 “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 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 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 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 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 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 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. Endnotes 1 Malkiel, Burton. “What Does the Prudent Investor Do Now?” Wall Street Journal (March 22, 2012). 2 Wirz, Matt. “As Corporate-Bond Yields Sink, Risks for Investors Rise.” www.wsj.<strong>com</strong> (Aug. 14, 2012). 3 29 U.S. Code Section 1104. 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 assets/590/588624.pdf). 5 Williamson, Christine. “Endowment Execs Focus on Liquidity, Volatility in Post-crisis Market,” Pensions & Investments Online (March 7, 2011). 6 Please see www.cboe.<strong>com</strong>/benchmarks for more details and studies on the BXM, BXY, CLL and PUT indexes. 7 See, e.g., Asset Consulting Group. “An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns,” (January 2012); Callan Associates. “An Historical 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 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 et al. “Finding Alpha via Covered Index Writing,” Financial Analysts Journal, (September-October 2006), pp. 29-46; Russell Investments. “Capturing the Volatility Premium through Call Overwriting,” (July 2012); Schneeweis et al. “The Benefits of Index Option-Based Strategies for Institutional Portfolios,” The Journal of Alternative Investments, (Spring 2001), pp. 44-52. 8 Whaley, Robert. “Risk and Return of the CBOE BuyWrite Monthly Index,” The Journal of Derivatives (Winter 2002) pp. 35-42. 9 See the February 2012 paper by Asset Consulting Group for more details about the indexes and tail-risk management. www.journalofindexes.<strong>com</strong> November / December 2012 27
Creating A Vertical Spread Index Benchmarking an options overlay strategy By Mark Abssy 28 November / December 2012
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