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Wednesday, May 22, 2019

Selling 30 Delta Calls – The BXMD Index

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In a previous post I talked about the CBOE BXY index, which simulates a Covered Call strategy on the S&P500 Index, selling Out of the Money Calls at strikes 2% higher than the index price. BXY has been superior to BXM (At the Money Calls) in terms of absolute returns, but it has been more volatile than BXM.

There is another CBOE Covered Call index that sells the 30 Delta Call Option. This is the BXMD Index. In a way it is similar to BXY as Out of the Money Calls are sold, but it is not a hard-coded 2% higher strike price. By using the 30-delta Call, it is automatically adjusted for volatility, some months the strike of the Call option will be farther away than others.

Consulting this paper by the Wilshire Analytics Applied Research Group and published on the CBOE website ,we can see that BXMD easily outperforms the S&P500 index, but perhaps more surprisingly it also beats the PUT Index!

This is again a testament to the power of Cash Secured Puts and Covered Calls. But let’s have a look at the yearly break-down of recent times:
Notice how both BXMD and PUT have a smaller loss than the S&P500 during the global financial crisis of 2008. This negates the somewhat popular(?) non-sense that ‘Options are weapons of mass destruction’.

Other Key Highlights listed on the Wilshire paper:
  • Total Return: Compared to a wide variety of asset classes, option-based indices offered above-average returns over the past 15 years; the BXMD and PUT indices consistently outperformed the U.S. Equity market over 30 years (Exh. 2 and 3).
  • Heat Map: BXMD and PUT typically had above-average returns and were rarely among the lower performing indices representing a variety of asset classes (equities, fixed income and commodities).
  • Volatility:Each of the five option-based indices had lower volatility than any other asset class included in the study other than fixed income, a traditionally low-volatility asset class (Exh. 4).
  • Downside Risk: The maximum drawdown for the option indices over 30 years was 24% lower, on average,than for the S&P 500®Index. Income captured by option-selling strategies enhances returns and cushions downside risk (Exh. 5).
  • Risk-adjusted Return: The BXMD and PUT indices were highest on the mean/variance Efficient Frontier. Compared to the S&P 500®, all three option-writing strategies had superior Sharpe Ratios while both the BXMD and PUT indices had both a higher return andlower volatility (Exh. 6 and 7).
  • Tail Risk: All three option-writing strategies had Sortinoratios equal to or better than the S&P 500®, with more “Up” months (positive returns) and fewer “Down” months (negative returns) than the S&P 500®(Exh. 7).
  • Implied vs. Realized Volatility: Implied Vol, as measured by the CBOE Volatility Index®(VIX®) exceeded Realized Vol in all but one of the past 18 years, rewarding option sellers. Average monthly gross premiums from writing options trended upward during the study period (Exh. 8 and 9).
  • Liquidity:Average Daily Volume (notional) for S&P 500® options has quadrupled over the past 10 years and indicates sustained liquidity regardless of the level of market volatility (Exh. 10).
For more information on the BXMD Index, consult: Cboe S&P 500 30-Delta BuyWrite Index (BXMD)

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