This article appeared first on enhanced-investing.com(on May 16, 2019)
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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).
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