By Matt Moran
SEPT. 21, 2016 – Wilshire Associates recently was ranked as one of the world’s ten largest investment consultants, due to the fact that it had more than $1 trillion in worldwide institutional assets under advisement, according to the survey published in the Nov. 30, 2015 issue of Pensions & Investments.
A new study – “Three Decades of Options-Based Benchmark Indices with Premium Selling or Buying: A Performance Analysis” – was released today. The study was commissioned by CBOE and authored by Wilshire Analytics’ Applied Research Group. It is the first major study that surveys 30 years of data related to benchmarks engaged in the buying and/or selling of index options.
Wilshire Analytics analyzed the performance of several indexes over a period of 30 years, from June 30, 1986 through June 30, 2016, including five indexes that sell and/or buy options on the S&P 500® (SPX) Index:
- CBOE S&P 500 BuyWrite Index (BXM)
- CBOE S&P 500 30-Delta BuyWrite Index (BXMD)
- CBOE S&P 500 Zero-Cost Put Spread Collar Index (CLLZ)
- CBOE S&P 500 5% Put Protection Index (PPUT)
- CBOE S&P 500 PutWrite Index (PUT)
The performance of these indexes was compared with certain other key stock, bond and commodity indexes that represent asset classes typically found in the investment portfolios of institutions and individual investors.
Key findings of the 30-year study include:
- Higher Absolute and Risk-Adjusted Returns: Two indexes that sold SPX options every month to collect option premium income – PUT and BXMD – both had higher absolute returns and higher risk-adjusted returns than the other indexes studied.
- Lower Volatility: Each of the five option-based indexes had lower volatility than all the other indexes included in the study, other than the fixed-income index.
- Less Downside Risk: The maximum drawdown for the options-based indexes was 24 percent lower, on average, than for the S&P 500 Index.
- Market Capacity and Liquidity: The notional value of SPX options’ average daily volume grew significantly over the last 10 years; it was more than $200 billion for the 12 months ended June 2016, the most recent year studied.
- Pension Plan Allocations: Analysis of actual pension plan allocations suggests plan sponsors would have benefited from the addition of index-based buy-write option strategies.
RETURNS AND VOLATILITY OVER 30 YEARS
As shown in the first charts below, over the three-decade period, the option-selling indexes (BXMD, PUT and BXM) all had higher returns than the option-buying index (PPUT) and the MSCI EAFE and S&P GSCI indexes. Index option-selling indexes can benefit from the fact that the implied volatility usually has exceeded realized volatility, as is shown in Exhibit 8 of the study.
The five options-based indexes are shown in the triangle symbols on the Efficient Frontier chart.
NEW HEAT MAP
A new “heat map” uses color coding to rank returns across asset class by year (within each column).
Over the past 15 years, option-writing strategies, particularly the BXMD and PUT strategies, typically had above-average returns and were rarely among the lower-performing asset classes. Other asset classes were occasionally top performers but also were ranked at or near the bottom more than once. Past performance is not predictive of future returns. Sources: Bloomberg, CBOE, St. Louis Federal Reserve Bank and Wilshire Associates.
$200 BILLION IN AVERAGE DAILY NOTIONAL VOLUME FOR SPX OPTIONS
After hearing about the strong performance of certain CBOE benchmark indexes, institutional investors often ask me about market capacity for SPX options. The study presents a chart that shows that the estimated notional value of average daily volume in SPX options grew to more than $200 billion in the last 12 months studied.