Many novice and not-so-novice investors think all option strategies are dangerous and volatile, but a new white paper commissioned by the Chicago Board Options Exchange (CBOE) pours a warm bucket of reality over that incorrect assumption. According to the study, option-based strategies that buy and sell S&P 500 index options have outperformed the benchmark itself, with lower volatility, dating all the way back to 1988.
The study was overseen by INGARM (Institute for Global Asset and Risk Management) and co-authored by Keith Black, Ph.D., CAIA, CFA, Managing Director of the Chartered Alternative Investment Analyst Association (CAIA) and Edward Szado, Ph.D., CFA, Assistant Professor of Finance, Providence College.
Options Based Indices Outperform Historically
From mid-1988 through the end of 2014, the CBOE S&P 500 PutWrite Index (PUT) and the CBOE S&P 500 2% BuyWrite Index (BXY) both produced higher returns with lower volatility than the S&P 500. They also outperformed the S&P GSCI Index on both absolute and risk-adjusted bases.
The “PutWrite” strategy involves selling put options on the S&P 500 Index, which is a bullish, income-generating strategy. The “BuyWrite” strategy involves selling call options on the S&P 500 that are covered by long exposure to the index, which is a strategy that generates income during bearish and neutral markets.
Growth in Number of Options Based Funds
There are many mutual funds employing these strategies, as well as other option strategies, and the number of option-based funds has skyrocketed since 2000. That year, there were just 10 option-based mutual funds, while as of the end of 2014, there were 119.
Investment Growth and Yield
The outperformance of option-based funds isn’t weighted heavily in the first 12 years of the since-’88 period, as they’ve also performed well since 2000. A $100 investment in the option-based funds in 2000 would have grown to $186 in value by the end of 2014 – the same as a $100 investment in the S&P 500. Meanwhile, $100 invested in the MSCI EAFE Index; which includes stocks native to Europe, Asia, and the Middle East; would have grown to just $132 over the same time.
Also important to income-oriented investors in the current yield-starved environment, option strategies have generated annual yields of 5% over the past 15 years.
Meanwhile, contrary to the conventional wisdom that options are “risky,” option-based strategies have had lower annual standard deviation than Treasurys, the S&P 500, the MSCI EAFE, and the S&P GSCI since 2000. This has resulted in lower maximum drawdowns for option-based funds than either S&P index or the MSCI EAFE, as evidenced by the graphic below:
The CBOE’s whitepaper, Performance Analysis of Options-Based Equity Mutual Funds, CEFs, and ETFs, is the first document to ever collect and publish the names and ticker symbols of the 119 option-based funds currently on the market. The largest funds include the following:
- The Gateway Fund (GATEX)
- The Eaton Vance Tax-Managed Diversified Equity Income Fund (ETY)
- The BlackRock Enhanced Equity Dividend Fund (BDJ)
- The NFJ Dividend, Interest & Premium Strategy Fund (NFJ)
And the three oldest funds are as follows:
- The Gateway Fund (GATEX) – 1977
- The Touchstone Dynamic Equity Fund (TDEYX) – 1978
- AMG FQ US Equity Fund (MEQFX) – 1992
For more information, download a pdf copy of the whitepaper.