Award-Winning PUT Index Now Has 31-Year Price History with Strong Risk-Adjusted Returns

Over the past couple of years more investors have expressed interest in the cash-secured put writing strategy. The leading performance benchmark for this strategy is the CBOE S&P 500 PutWrite Index (PUT), an index that measures the performance of a hypothetical portfolio that sells one-month S&P 500® Index (SPX) put options against collateralized cash reserves held in a money market account.

HIGHER RETURNS AND LOWER VOLATILITY

Note in the bar charts that the PUT Index had higher returns and lower volatility than the other six benchmark indexes, and put option writing (as represented by the PUT Index) had much higher returns than put option buying (as represented by the PPUT Index). A driving factor behind strong risk-adjusted returns for the PUT Index has been the volatility risk premium; options sellers often have been rewarded because implied volatility usually has been higher than realized volatility for S&P 500 options.

HISTOGRAM AND LESS LEFT-TAIL RISK

In the 31-year histogram, the left tail risk was mitigated in that the S&P 500 Index had 26 monthly declines with losses of worse than 6%, while the PUT Index had only 12 such declines.

NEWS COVERAGE OF PENSION FUNDS AND PUT-WRITE STRATEGY

Below are excerpts from three news stories on pension fund allocations to the put-write strategy.

  

  • Wall Street Journal   (Aug. 21, 2016)
    • Pensions Try a Fear Trade.  Options strategy used by pension funds aims to work like a volatility dampener Some pension funds are seeking to profit from others’ fear.   Pension funds in Hawaii and South Carolina are plying an arcane options strategy called cash-secured put writing. …  Hawaii wanted to diversify market exposure after the financial crisis hit many assets at once… Pension Consulting Alliance first suggested Hawaii use the strategy and currently advises on it, .. The CBOE S&P 500 PutWrite Index, a benchmark for the strategy, … didn’t fall as sharply as the market during the selloff of early 2016, but has lagged behind the rallies. In 2008, during the financial crisis, the put-write strategy returned minus-27% compared with the S&P 500’s return of minus-37%.  CBOE’s calculations of how the index would have performed before its 2007 creation estimate that annualized returns over the 30 years through this June were 10%, narrowly topping the S&P 500. …  ”

 

  • Pensions & Investments   (Oct. 3, 2016)
    • Funds go exotic with put-write options to stem volatility … Hawaii Employees in the spring hired Neuberger Berman, Analytic Investors, UBS Asset Management and Gateway Investment Advisers to run $400 million each in put-write strategies. This was the first move into the strategy for the pension fund. Earlier this year, the $28.2 billion South Carolina Retirement System Investment Commission, Columbia, hired Russell Implementation Services and AQR Capital Management to each manage $800 million in put-write strategies.  And the $16.6 billion Illinois State Universities Retirement System, Champaign, hired Gladius Capital Management to manage $400 million in notional value in a put-write overlay, a move that Executive Director W. Brian Lewis said would result in ‘an income enhancement tool’ … In its paper, Wilshire noted that the CBOE S&P 500 put-write index, with an annualized 10.1% return, outperformed the CBOE S&P 500 buy-write index’s 8.9% and the S&P 500 stock index’s 9.9% over 30 years ended Dec. 31. And for 2015 alone, the put-write index returned 6.4% vs. the buy-write index’s 5.2% and the S&P 500’s 1.4%. …” 

 RESEARCH PAPERS THAT HIGHLIGHT THE PUT INDEX

Visit www.cboe.com/benchmarks for links to the papers below that analyze the performance of the PUT and other benchmark indexes —

GROWTH IN VOLUME FOR S&P 500 OPTIONS

Average daily volume for S&P 500 options at CBOE: (1) has risen in each of the last 5 years, and (2) has risen more than 1000% since 2001.

AWARD FOR PUT INDEX AND PUTW ETF

On June 26 the CBOE S&P 500 PutWrite Index (PUT) and the WisdomTree CBOE S&P 500 PutWrite Strategy Fund ETF (PUTW) won the 2017 Index/ETF Product of the Year award at an annual ceremony that was presented by IMN and the Journal of Index Investing. The awards ceremony was held during the 22nd Annual Global Indexing and ETFs conference, a 3-day event with about 750 financial professionals (including representatives of CBOE, Bats, S&P Dow Jones Indices, and ETF.com) in attendance.

Representatives of both CBOE and S&P Dow Jones Indices celebrated the award for the 2017 Index/ETF Product of the Year.

MORE INFORMATION

The microsite for the PUT Index is at www.cboe.com/PUT.

For more information on dozens of CBOE benchmark indexes, please visit www.cboe.com/benchmarks for research papers and price charts,

If you would like to hear expert speakers discuss options and volatility, please visit www.cboermc.com to learn more about these upcoming CBOE Risk Management Conferences —

  • RMC EUROPE 2017, Sept. 11 – 13, 2017, The Grove Hotel, Chandler’s Cross, Hertfordshire, UK

 

  • RMC ASIA 2017, Dec 5 – 6, 2017, Conrad Hong Kong, Hong Kong

 

  • RMC US 2017, March 7 – 9, 2018, Hyatt Regency Coconut Point, FL

Weekend Review of VIX Options and Futures – 7/2/2017

IX had quite a midweek move rising above 15.00 for a very short period of time before settling at 11.18 to end the week.  Note the VIX action didn’t have much of an impact on the futures contracts which can be attributed to the steep nature of the curve going into last week.

VIX Curve Table 06302017 Corrected

I spoke about the following trade on the Vol Views podcast this past Friday.  However, it was such a great use of VIX Weeklys that I wanted to repeat the trade here.  On Monday last week, with VIX at 9.80 a trader came in and purchased 989 VIX Jun 28th 9 Calls for 1.25 and then sold 989 VIX Jun 28th10 Calls for 0.41 and a net cost of 0.84.  All they needed was a VIX settlement on Wednesday morning above 10.00 to realize a gain of 0.16.  I know the numbers aren’t all that exciting, but this is a good use of very short dated VIX options with an outcome that is pretty likely to result in the maximum profit of 0.16.  Note on the payoff diagram below that’s exactly what happened as VIX settlement for June 28th came in at 10.52.

VIX PO 06302017

Weekend Review of Volatility Indexes and ETPs – 7/2/2017

I’ve been traveling like a madman on behalf of CBOE in June.  I try my best to keep up with the markets when I’m out and about, but sometimes the catch up occurs outside of real time.  This weekend is one of those catch up weekends.  I was aware of the VIX move over 15.00 (who wasn’t?) and that VIX was a bit higher than it had been for most of 2017 to finish the week.  What surprised me was the level of VXST on Friday.

VXST is a measure of 9-day volatility expectations as indicated by short dated SPX option contracts.  When we have holiday weekends VXST tends to come under a bit of pressure since there will be an extra day without trading figuring into the calculation.  Hence my surprise when VXST was elevated as much as it was on a week over week basis on the VXST – VIX – VXV – VXMT term structure chart below.

VXST - VIX - VXV -VXMT

TYVIX up 20% stands out on the table below which is probably a function of last week’s VIX spike being somewhat central bank oriented.  VXX was higher, but VXZ lost a bit of value.  As a reminder VXX owns the front two month VIX futures while VXZ is long months 4 through 7.  The short end of the VIX curve was higher while the long end was lower last week.

VXX Table 06302017

We ended the first half of 2017 on Friday and the result was VXX down just a rounding error less than 50%.  SVXY has a stellar six months as short volatility strategies have ruled in 2017.

VXX UVXY SVXY 06302017

The FANG stocks have been in the news off and on lately due to some pressure which I’m going to attribute to profit taking or more willing sellers than buyers (both are silly statements, I know).  Whatever the reason, the option markets on the FANG (Facebook, Apple, Netflix, Google) have been very active and we have an example of this as VXAPL and VXGOG were the leading gainers last week.  Price action plus earnings season being around the corner contribute to the strong moves in the individual stock volatility indexes.

PUT Index and PUTW ETF Win Sharpe Indexing Award

On June 26 the CBOE S&P 500 PutWrite Index (PUT) and the WisdomTree CBOE S&P 500 PutWrite Strategy Fund ETF (PUTW) won the 2017 Index/ETF Product of the Year award at an annual ceremony that was presented by IMN and the Journal of Index Investing. The awards ceremony was held during the 22nd Annual Global Indexing and ETFs conference, a 3-day event with about 750 financial professionals (including reps of CBOE, S&P Global, Bats, and ETF.com) in attendance.

PERFORMANCE OF PUT INDEX OVER THREE DECADES

The PUT Index measures the performance of a hypothetical portfolio that sells one-month S&P 500 Index (SPX) put options against collateralized cash reserves held in a money market account.

As shown in the three charts below, over more than three decades the PUT Index had higher returns and lower volatility than key benchmark indexes for stocks, Treasury bonds and commodities. In addition, papers by Bondarenko (2016)Black and Szado (2016) and Wilshire (2016) have statistics showing superior risk-adjusted returns and lower drawdowns for the PUT Index.

Note in the bar charts that put option writing (a represented by the PUT Index) had higher returns than put option buying (as represented by the PPUT Index). A driving factor behind strong risk-adjusted returns for the PUT Index has been the volatility risk premium.

VOLATILITY RISK PREMIUM – RICHLY PRICED INDEX OPTIONS

An inquiring investor might ask – how could the PUT Index have higher returns and lower volatility than traditional indexes over a period of three decades?

A key source of returns for sellers of SPX index options has been the fact that, according to Exhibit 5 in a 2016 paper by Professor Oleg Bondarenko, these options were richly priced in all the years from 1990 through 2015 (except in 2008).

MORE INFORMATION

The microsite for the PUT Index is at www.cboe.com/PUT.

For more information on dozens of CBOE benchmark indexes, please visit www.cboe.com/benchmarks for research papers and price charts,

If you would like to hear expert speakers discuss options and volatility, please visit www.cboermc.com to learn more about these upcoming CBOE Risk Management Conferences

  • RMC EUROPE 2017, Sept. 11 – 13, 2017, The Grove Hotel, Chandler’s Cross, Hertfordshire, UK
  • RMC ASIA 2017, Dec 5 – 6, 2017, Conrad Hong Kong, Hong Kong
  • RMC US 2017, March 7 – 9, 2018, Hyatt Regency Coconut Point, FL

 

Weekend Review of VIX Futures and Options – 6/25/2017

VIX was a bit lower to end the week and the curve moved down as well.   We retired June last week and now July is the front month and is at a premium of just over 1.80 to finish the week.

VIX Table Curve 06232017

Before getting into a trade I would like to point out some heavy activity that abounded last week in the VIX Weekly options expiring this coming week.  There was a pretty big buyer of the VIX Jun 28th 19, 20, and 21 Calls paying 0.10 for the 19’s and 0.05 for both the 20’s and 21’s.  A majority of these trades occurred early this past week.  The figure below shows the open interest for each of these far out of the money VIX call options that only have two trading days remaining until expiration.  Adding the open interest for all three strikes together results in over 80,000 open positions.  That’s pretty good for many standard expiration strike and remarkable for the VIX Weeklys.

VIX June 28 Table OI

On Wednesday, there were two familiar, similar, and interesting trades that hit the VIX pit.  They were familiar in structure as they involved selling a put to help pay for a call spread.  They both are looking for some sort of volatility spike between now and late July, more likely in late July than in the near future.  What makes them interesting is they were executed in a weekly or non-standard series of VIX options.  Trade one involved selling the VIX Jul 26th 10.50 Puts for 0.21, buying the VIX Jul 26th 17.00 Calls for 0.54 and selling the VIX Jul 26th 30.00 Calls for 0.15 which results in a net cost of 0.18.  The other trade sold the VIX Jul 26th 11.00 Puts for 0.45, purchased the VIX Jul 26th 15 Calls at 0.68, and selling the VIX Jul 26th 30 Calls for 0.09 which results in a cost of 0.14.  The payoff diagram below shows the outcome for both trades if held through expiration.

VIX PO 06232017

Note both shapes are very similar with a low dollar cost up front, potential downside with VIX hovering around 2017 lows, and some great upside potential.  The thing that gets me is the timing, why the July 26th series instead of the standard July expiration the week before these options go off the board?  If may be worth checking the economic and earnings calendar to see if something specific is scheduled between those two expiration dates.

Weekend Review of Volatility Indexes and ETPs – 6/25/2017

VXST was slightly higher while the rest of the SPX related volatility indexes dropped last week.  All moves were relatively small as we have truly entered the summer doldrums, at least for broad based index volatility.

VXST VIX VXV VXMT 06232017

There’s very little exciting on the table below.  TYVIX bumped up slightly, but is still at very low levels.  VVIX remaining over 80.00 is interesting as traders may continue to take advantage low VIX to get long volatility exposure through buying calls or spreads that put some upward pressure on OTM calls.

VXX Table 06232017

We are at almost the mid-point for 2017 and short volatility has ruled the year.  SVXY is up over 80% while VXX is down a little over 50%.  When a fund loses 50%, you need a 100% gain to get back to flat.  Don’t count VXX out for the year as the underlying index gained over 100% in October 2008.  I’m not predicting that sort of action again this year, but just noting it has happened in the past.

VXX SVXY UVXY 06232017

I mentioned equity index volatility was tame, but that doesn’t mean all volatility was boring last week.  Headline price action in the oil market resulted in nice gains for OVX and VXXLE.  VXGS was the leader of the pack last week which I’m going to attribute mostly to earnings, but also to some bullish option activity that keeps popping up in the financial sector.

Vol Indexes 06232017

Any strength in VXX this past week came on Tuesday.  Mid-day VXX was around 12.95 and a bear put spread was executed when the VXX Jun 23rd 13.00 Puts were purchased for 0.31 and the VXX Jun 23rd 12.50 Puts were sold for 0.07 resulting in a net cost of 0.24.

VXX PO 06232017

This trade was nearly perfect as VXX finished the week at 12.54, just 0.04 above the short strike.  Of course, it is very possible our trader exited this position early, but even if that were the case I bet they were happy with the outcome.

Weekend Review of VIX Futures and Options – 6/18/2017

VIX gave volatility bulls a little hope on Monday rising to the highest intra-day level since VIX was receding from the news flow that followed the firing of Comey by Donald Trump in the middle of May.  However, as is the norm, VIX dropped and worked lower with the curve following in suit.

VIX Table TS 06192017

As Monday was the only day of real strength for VIX and the June VIX futures.  One trader took advantage of that by selling an out of the money call spread.  Late Monday as VIX was near 11.65 and the June VIX futures were at 12.05 a trader sold the VIX Jun 15 Calls at 0.32 and then purchased the VIX Jun 18 Calls for 0.19 taking in a credit of 0.13.  As long as standard June VIX settlement on the open next Wednesday is below 15.00 this trade will realize the maximum gain equal to the credit.

VIX PO 06162017

Weekend Review of Volatility Indexes and ETPs – 6/18/2017

As the week came to a close VXST which measures 9-day volatility expectations took a dive.  Hence the big drop on the left side of the VXST – VIX – VXV – VXMT diagram below.

VXST VIX VXV VXMT 06162017

TYVIX finished the week below 4.00 which was a first for 2017, but not outside of the long term historical range.  I checked the market expectations for the next FOMC meeting in late July and right now we have a 100% chance of nothing happening.  That much certainty probably justifies such a low volatility expectation.  Skew worked a little bit higher last week and VVIX was little changed which can be considered indications that there is at least some concern about the future direction of stocks.

VXX Table 06162017

The long funds continue to experience a dreadful year in 2017 while SVXY will probably be near the top of many mid-year performance charts in a couple of weeks which always brings new (neophyte) investors into this space.  Of course the first 20% pullback will scare many away at what has historically been the best time to purchase a short volatility fund like VMIN, SVXY, or XIV.

VXX SVXY UVXY 06162017

With a couple of small exceptions the volatility indexes quoted by CBOE were mostly lower last week.  I see no pattern in the mix of indexes that rose so it’s tough to attribute the green changes below to anything other than market randomness..

Vol Index Prices 06162017

I guess the trade below is a version of Monday morning quarterbacking (post-expiration perfect trade fitting?).  The only life VIX really experienced last week came on Monday, which also pushed VXX higher for the day.  As the end of the day approached a trader came in and purchased 100 VXX Jun 16 13.50 Puts for 0.40 combined with selling the same number of VXX Jun 16 13.00 Puts for 0.14 and a net cost of 0.26.  I admitted as I started discussing this trade that I was benefiting from hindsight and we can see this trade was perfect based on where VXX closed Friday.

VXX PO 06162017

Weekend Review of VIX Futures and Options – 6/11/2017

VIX was higher by about 10% last week, but that did not have much of an impact on the rest of the term structure.  The futures were mixed which can be attributed to just how steep the VIX curve was going into the week.

VIX TS Table

Before things turned to the upside on Friday we experienced the lowest level for VIX since 1993.  The table below ranks the lowest inter-day lows for VIX since 1990.  Note Friday ranks 6th and 4 of the 10 on the list occurred this year.

A couple of bullish VIX trades hit the pit right around the market close on Friday.  First, there was a seller of a June put spread that is looking for VIX to achieve 11.00 and remain above that level (if held to expiration).  Specifically there was a seller of 1000 of the VIX Jun 21st 11 Puts at 0.35 who purchased the VIX Jun 21st 10 Puts for 0.08 and a net credit of 0.27.  The risk to this trade involved VIX back down in the single digits which would result in a loss of 0.73.

VIX PO1 06092017

The other trade is probably more dynamic and was initiated at no cost.  A trader purchased 3000 VIX Jun 21st 14 Calls at 0.36 and then sold 4500 of the VIX Jun 21st 17 Calls for 0.18.  Two results show up on the diagram below.  The curved line is with 3 trading days to expiration and the other shows expiration, which is only 7 trading days and an overnight away.

VIX PO2 06092017

Note that a move for VIX or more specifically the Jun VIX futures to the 13 to 19 range results in a profit for this trade.  Since VIX tends to spike and regress pretty quickly any move to this range would prompt many traders to try to take partial of full profits.

Weekend Review of Volatility Indexes and ETPs – 6/11/2017

That little bump in VXST that shows up on the far left side of the diagram below can be attributed to Friday afternoon activity.  VXST rose 0.75 Friday while VIX was up 0.54.  Shorter dated SPX option pricing is used to calculate VXST than VIX.  It may be the weakness Friday afternoon in large cap tech stocks may have traders worrying about the direction of the stock market over the short term.

VXST VIX VXV VXMT

Several things pop out at me on the table below.  VMAX had a nice week rising 2% and outpacing the other long unleveraged VIX related ETPs.  SKEW is fairly high, which with VIX rebounding a bit is a more worrisome reading than when VIX was under 10.00 or working its way down there.  VVIX rising with higher VIX is an indication that demand for VIX calls seems to be increasing.  Finally, a different theme, but it is interesting to see the weakness in EVIX, which is based on VSTOXX futures, that accompanies the UK election coming to a conclusion at the end of last week.

VXX Table

On Friday the Nasdaq-100 (NDX) was down 1.8%, the S&P 500 was down only 0.08%, and the Russell 2000 (RUT) gained 0.43%.  This is a heck of a divergence and this shows up some in the table below with VXN coming in as the leading gainer among volatility indexes quoted by CBOE.  In fact Friday was the 9th biggest single day gain for VXN on record.  Note the volatility indexes that represent option activity in two big NDX stocks are high up on the list as well.    At the bottom of the list is BPVIX followed closely by the other currency related volatility indexes.

Vol Indexes 06092017

VXX and UVXY were both up slightly last week.  However, 2017 has been anything but kind to anyone long volatility.  On the flip side SVXY up over 70% on the year.

SVXY UVXY VXX 06092017

Finally, I came across a pretty interesting SVXY trade from late Friday.  With SVXY at 154.26 someone sold 100 SVXY Jun 16th 131 Puts at 1.15.  That’s it, a pure sell of put options.  Normally I shy away from discussing such trades, but SVXY is a different animal.  When you sell puts you get the obligation to buy the underlying.  The long term trend for short volatility funds is up, with some bumps in the road.  Taking on the obligation to buy SVXY this coming Friday at 131.00 a share means purchasing the fund if it drops 15% or more next week.  It is very possible for SVXY to lose 15% in a week or even much more.  However, SVXY does make sense as a buy on a drip and this trade accomplishes just that with the result of not buying being a profit equal to the 1.15 credit taken in Friday afternoon.

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