CBOE Risk Management Conference
Beyond BXM & PUT:
New Option Strategy Benchmarks
William Speth, VP Research & Product Development
March 4, 2015
Forward Looking Statements
This presentation may contain forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are those statements that
reflect our expectations, assumptions or projections about the future and involve a number of
risks and uncertainties. These statements are only predictions based on our current expectations
and projections about future events. There are important factors that could cause actual results to
differ materially from that expressed or implied by the forward-looking statements, including: the
loss of our exclusive licenses to list certain index options; decreases in the amount of trading
volumes or a shift in the mix of products traded on our exchanges; legislative or regulatory
changes affecting the options markets; increasing competition by foreign and domestic entities,
including increased competition from new entrants into our markets and consolidation of existing
entities; increasing price competition; our ability to maintain access fee revenues; economic,
political and market conditions; our ability to operate our business without violating the
intellectual property rights of others and the costs associated with protecting our intellectual
property rights; our ability to accommodate increases in trading volume and order transaction
traffic without failure or degradation of performance of our systems; our ability to protect our
systems and communication networks from security risks, including cyber attacks; our ability to
attract and retain skilled management and other personnel; our ability to maintain our growth
effectively; our dependence on third party service providers; and the ability of our compliance and
risk management methods to effectively monitor and manage our risks.
More detailed information about factors that may affect our performance may be found in our
filings with the SEC, including in our Annual Report on Form 10-K for the year ended December 31,
2011 and other filings made from time to time with the SEC.
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Strategy Benchmark Principles
Systematic use of options / futures to
achieve an investment objective
•
Enhance Yield
–
–
•
Reduce Risk
–
–
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CBOE® S&P 500® BuyWrite Index (BXMSM)
CBOE® Russell 2000® BuyWrite Index (BXR)
CBOE® S&P 500® 95-110 Collar Index (CLL)
CBOE® VIX® Tail Hedge Index (VXTH)
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Yield Enhancing Strategies
Selling options is one way to capture risk premium
& enhance portfolio yield
Selling at-the-money options captures the most
time premium, but offers the least upside
Option price ∝ 𝑡𝑖𝑚𝑒
•
•
•
Collect more total premium selling short-dated options
Risk / Reward profiles can be very different
Be aware of implied volatility term structure
Inherent path dependency
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BuyWrite using WeeklysSM
Sell 1-week ATM SPX option; Hold to expiration; Repeat
Weekly BuyWrite vs. BXM
1400
1300
1200
1100
1000
900
800
700
600
500
Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14
October 2007 through January 2015
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Weekly BuyWrite
BXM
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BuyWrite using WeeklysSM
Analysis of Weekly BuyWrite Monthly Returns
10%
8%
6%
Monthly Return
4%
2%
0%
< -5%
-2%
-5% to -2%
-2% to 0%
0% to 2%
2% to 5%
> 5%
SPTR Return Bucket
-4%
-6%
-8%
-10%
Weekly BuyWrite
BXM
SPTR
October 2007 through January 2015
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Rolling-Weekly BuyWrite Strategy
Stagger the sale of 1-month ATM SPX calls; each option covering ≈ 25% of
portfolio value; Hold to expiration; Replace expiring 1-month ATM call
Rolling-Weekly & Weekly BuyWrite vs. BXM
1400
1350
1300
1250
1200
1150
1100
1050
1000
950
900
Jun-12
Sep-12
June 2012 through January 2015
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Dec-12
Mar-13
Jun-13
Rolling-Weekly
Sep-13
Dec-13
Weekly
Mar-14
Jun-14
Sep-14
Dec-14
BXM
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Rolling-Weekly BuyWrite Strategy
Analysis of Monthly Returns
6%
5%
4%
Monthly Return
3%
2%
1%
0%
< -5%
-5% to -2%
-2% to 0%
0% to 2%
2% to 5%
> 5%
-1%
SPTR Return Bucket
-2%
-3%
-4%
Rolling Weekly
Weekly
BXM
SPTR
June 2012 through January 2015
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Risk Reducing Strategies
Effective hedging programs do not try to
eliminate all risk
Virtually limitless combinations
Weigh the benefits of protection with the
cost of hedging to achieve an optimal risk
profile
Understand your hedging tools
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Optimizing Your Hedging Strategy
Married Put
10
9
9
9
P&L
10
5
0
0
-10
Unhedged
Protection
Hedged
Zero-Cost Collar
10
P&L
10
0
5
-10
0
Unhedged
Hedged
Zero-Cost Put Spread Collar
Upside
Upfront Cost
9
3
0
Protection
Upside
Upfront Cost
10
P&L
10
5
0
-10
5
0
0
Unhedged
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Hedged
Protection
Upside
Upfront Cost
10
Collar Construction
Zero-Cost Collar
•
•
Buy 1M 2.5% OTM SPX Put
Sell 1M OTM SPX Call to cover cost of put
Avg. cost 1%; Avg. upside cap 1.5%*
Zero-Cost Put Spread Collar (1M)
•
•
Buy 1M 2.5% OTM SPX Put / Sell 1M 5% OTM SPX Put
Sell 1M OTM SPX Call to cover cost of put spread
Avg. cost 0.5%; Avg. upside cap 3.5%
Zero-Cost Put Spread Collar (3M)
•
•
Buy 3M 2.5% OTM SPX Put / Sell 3M 5% OTM SPX Put
Sell 3M OTM SPX Call to cover cost of put spread
Avg. cost 0.75%; Avg. upside cap 7.5%
* Based on roll activity from January 1992
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Hedging with Zero-Cost Collars
Zero-Cost Collars vs. S&P 500 Total Return Index
9000
8000
V
7000
6000
5000
I
4000
II
III
IV
3000
2000
1000
0
SPTR
1M 2.5% - 5% OTM Put Spread
1M 2.5% OTM Put
3M 2.5% - 5% OTM Put Spread
January 1992 through January 2015
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MARCH 2000 - MARCH
2003 (II)
175%
26%
-50%
-22%
-47%
-55%
14%
6%
13%
17%
21%
8%
19%
9%
7%
MARCH 2003 - OCTOBER OCTOBER 2007 - MARCH MARCH 2009 - JANUARY
2007 (III)
2009 (IV)
2015 (V)
SPTR
1M 2.5% - 5% OTM Put Spread
January 1992 through January 2015
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9%
12%
19%
10%
18%
12%
7%
11%
14%
23%
38%
VOLATILITY
JANUARY 1992 - MARCH
2000 (I)
127%
89%
18%
54%
-37%
-20%
-35%
-45%
95%
112%
235%
256%
RETURNS
216%
337%
Zero-Cost Collar Performance
1M 2.5% OTM Put
3M 2.5% - 5% OTM Put Spread
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What’s next?
Introducing in 2015…
CBOE Rolling Weekly BuyWrite Index Series
CBOE Zero-Cost Put Spread Collar Index Series
S&P, FTSE-Russell, MSCI…
Next Generation Strategy Benchmarks…
“Smart” BuyWrites, PutWrites & Collars
Straddles, Strangles, “Condors”
“Hybrid” Hedging / Yield Enhancing Strategies
•
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Combining VIX / Index exposures
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Disclaimer
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a
person must receive a copy of Characteristics and Risks of Standardized Options. Copies are
available from your broker, by calling 1-888-OPTIONS, or at www.theocc.com. Futures trading is
not suitable for all investors, and involves risk of loss. The information in this document is
provided solely for general education and information purposes. Past performance is not
indicative of future results. No statement within this document should be construed as a
recommendation to buy or sell a security or future or to provide investment advice. This
document 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 in this document solely for informational purposes. Supporting
documentation for any claims, comparisons, statistics, or other technical data, will be supplied
upon request. Standard &Poor’s®, S&P®, and S&P 500® are registered trademarks of Standard
& Poor’s Financial Services, LLC and are licensed for use by Chicago Board Options Exchange,
Incorporated (CBOE) and CBOE Futures Exchange, LLC (CFE). S&P does not sponsor, endorse, sell
or promote any S&P index-based investment product. CBOE®, CFE®, CBOE Volatility Index®,
Chicago Board Options Exchange® and VIX® are registered trademarks and CBOE Futures
Exchange, RVX, SPX, SRVX, VXD, VXN,VXV, VXEEM, VXEWZ, VXST, VXTYN and Weeklys are
service marks of CBOE. All other trademarks and service marks are the property of their
respective owners. Copyright © 2014 Chicago Board Options Exchange, Incorporated. All Rights
Reserved. CBOE 400 South LaSalle Street Chicago, IL 60605
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