The Cboe S&P 500 Putwrite Index (PUT) is designed to reflect a cash-secured put-writing strategy. The PUT strategy is designed to sell a sequence of one-month, at-the-money, S&P 500 (SPX) Index puts and invest cash at one- and three-month Treasury bill rates. The number of puts sold is limited so that the amount held in Treasury Bills can finance the loss from final settlement of the SPX puts.
In recent years the PUT Index and the cash-secured put-write strategy have gained more interest from and acceptance by fund managers.
With the increased volatility this month, we are receiving questions from investors and the news media about the impact of higher volatility and possible stock market declines on the performance of the PUT Index. We are fortunate in that the price history for the PUT Index goes back more than 31 years to mid-1986, and so analysts can see the absolute and relative returns in various market regimes – high- and low-volatility, and bullish and bearish stock markets.
LESS SEVERE DROPS FOR KEY OPTION-WRITING INDEXES IN FEBRUARY 2018
So far in February 2018 (through Feb. 15), the S&P 500 (total return) index fell 3.1%, while the Cboe’s PUT and BXM indexes fell 1.7%. Many covered option-writing strategies are designed to provide a cushion in the event of a big drop in stock index prices.
LOWER STANDARD DEVIATIONS FOR PUT OVER MORE THAN THREE DECADES
The fact that the PUT Index engages in a cash-secured strategy that holds Treasury bills has helped the index have significantly lower standard deviations than the S&P 500, MSCI EAFE and S&P GSCI indexes since mid-1986.
LESS SEVERE DRAWDOWNS FOR BOTH PUT AND WPUT INDEXES
A 2016 paper by Professor Oleg Bondarenko found that two indexes that engage in cash-secured writing of SPX puts had less severe drawdowns than the S&P 500® stock index. According to the paper, the worst drawdowns were down 32.7% for the PUT Index, down 24.2% for the Cboe S&P 500 One-week PutWrite Index (WPUT, an index that sells cash-secured SPX options every week), and down 50.9% for the S&P 500 Index.
HIGHER MONTHLY PREMIUMS FOR PUT IN VOLATILE MONTHS
As shown in the chart below, the PUT Index has generated gross premiums that have averaged 1.7% per month, and in the volatile year of 2008, the gross premiums generated topped 6% in two consecutive months.
RELATIVE RETURNS FOR PUT IN TWO VOLATILE YEARS
Since 1990 the two years with the highest average levels for the Cboe Volatility Index® (VIX®) were 2009 and 2009, years in which the S&P 500 total return index fell 37% and rose 26.5%, respectively. As shown in the table below, during both those years the PUT Index had higher returns than the S&P 500 Index; in 2008 the premiums received by the PUT Index served as a cushion during the big drawdown for stocks, and in 2009 the average daily closing level for the VIX Index was 31.5 (the second highest value for any year), and the aggregate amount of gross premiums received by the PUT Index totaled 38.6%.
HIGHER RISK-ADJUSTED RETURNS FOR PUT INDEX
Many investors are interested in indexes that have relatively strong risk-adjusted returns. Exhibit 19 of the 2016 paper by Oleg Bondarenko showed that, since mid-1986, the PUT Index had stronger risk-adjusted returns (as measured by the Sharpe Ratio, Sortino Ratio (which looks at downside deviations), and Stutzer Index (which makes adjustments for positive or negative skewness) than three stock indexes and a Treasury bond index.
MORE INFORMATION AND WHITE PAPERS
To learn more as to how cash-secured put writing and the PUT Index can be used in the management of your portfolio, please visit www.cboe.com/PUT and click on the links to these white papers —
- Aon Hewitt. Harvesting the Equity Insurance Risk Premium: Know Your Options (December 2014)
- Asset Consulting Group. An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns (January 2012)
- Black, Keith, and Edward Szado. Performance Analysis of Cboe S&P 500 Options-Selling Indices. (2016)
- Bondarenko, Oleg. An Analysis of Index Option Writing with Monthly and Weekly Rollover. (2016)
- Cambridge Associates, LLC. Highlights from the Benefits of Selling Volatility (2011)
- Ennis Knupp & Associates. “Evaluating the Performance Characteristics of the Cboe S&P 500 PutWrite Index” (December 2008)
- Parametric Portfolio Associates. “Volatility Risk Premium and Financial Distress” (August 2016)
- Russell Investments. Capturing the Volatility Premium through Call Overwriting. (July 2012)
- Wilshire. “Three Decades of Options-Based Benchmark Indices with Premium Selling or Buying: A Performance Analysis” (2016)