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.
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