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Passive Options-based Investment Strategies: The Case of the CBOE S&P 500 Buy Write Index
Barry Feldman, Ph.D. and Dhruv Roy
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This paper assesses the investment value of the CBOE S&P 500 BuyWrite (BXM) Index and its covered call investment strategy to an investor from the total portfolio perspective. Whaley [2002] finds risk-adjusted performance improvement based on the BXM Index in individual comparison to the S&P 500. We replicate this work with a longer history for the BXM Index and with the short but meaningful history of the Rampart Investment Management investable version of the BXM. We use the Stutzer [2000] index and Leland’s [1999] alpha to assess risk-adjusted performance taking the skew and kurtosis of the covered call strategy into account. Additionally, we compare standard investor portfolios to portfolios where BXM has been substituted for large cap assets and find significant risk-adjusted performance improvement.

The compound annual return of the BXM Index over the almost 16-year history of this study is 12.39, compared to 12.20 for the S&P 500. Risk-adjusted performance, as measured by the Stutzer index, is 0.22 for the BXM versus 0.16 for the S&P 500 [monthly]. Leland’s alpha is 2.81/yr. The tracking error of the Rampart investable version of the BXM (1.27/yr) is found to be credible evidence of the investability of the BXM Index.

Known sources of BXM return are reviewed and behavioral factors that may haveenhanced BXM performance are considered.

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