What do portfolio managers say about investments to consider in times of high price/earnings ratios for stocks and low interest rates for bonds? One money manager, Ronald Egalka, President and Chief Investment Officer, Rampart Investment Management Company in Boston, has noted –
“Market experience ranks among our most valuable assets. Since 1983 Rampart has responded to different market scenarios with systematic and disciplined options solutions, helping clients generate incremental yield, soften downside risk and dampen volatility. Over a decade ago, Rampart recognized the need for an options benchmark to help investors appreciate the special risk-reducing, return-enhancing characteristics of buying a portfolio of stocks and systematically selling calls on that portfolio. In 2003 Rampart became the first licensee of the CBOE S&P 500 BuyWrite Index or ‘BXM.’ Other important benchmark indexes that sell one-month S&P 500® (SPX) options include the CBOE S&P 500 2% OTM BuyWrite Index (BXY) and the CBOE S&P 500 PutWrite Index (PUT). Over the past 25 years, all of the foregoing CBOE indexes have had less volatility than the S&P 500 stock index.”
GOLDMAN SACHS AND THE BXY INDEX
A Barron’s Striking Price column on November 22, 2014, by Steven Sears – “An Options Play for a Low-Return Market” – stated that Goldman Sachs reps —
“… note that CBOE’s S&P 500 2% OTM BuyWrite Index (BXY), which tracks the performance of monthly 2% out-of-the-money call sales, has historically outperformed in periods of low S&P 500 returns. They think the options strategy will be attractive during the second half as the market slips at the time of the Fed hike. ‘The potential incremental return generated by call overwriting is significant,’ Goldman is telling clients. Indeed, when S&P 500 returns have been between 0% and 5%, investors implementing the BXY overwriting strategy have outperformed the index by an average of 264 basis points (2.64 percentage points)…”
BXY INDEX PERFORMANCE SINCE THE LATE 1980s
As shown in the charts below, since the late 1980s the BXY Index had higher returns and lower volatility than the S&P 500 and S&P GSCI (commodity) indexes. A key driver of the strong performance by BXY is the fact that index options usually have been richly priced in past years. Past performance is not a predictor of future returns. To learn more about portfolio managers and CBOE benchmark indexes, please visit www.cboe.com/Funds.
No statement in this blog should be construed as a recommendation to buy or sell a security or futures contract or to provide investment advice. Past performance does not guarantee future results. This webpage contains index performance data based on back-testing, i.e., calculations of how the index might have performed prior to launch. Backtested performance information is purely hypothetical and is provided on this webpage solely for informational purposes. The inclusion of statements by non-CBOE representatives in this Blog should not be construed as an endorsement or an indication of the value of any product, security, fund, service, or other website.