Benchmark Indexes

Comparing Returns of Various Strategies

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Position Size. Google Images

"Past Performance is not necessarily indicative of future results." 

We have seen that disclaimer many times. However, it represents a very sound warning.

When looking at past performance, there are two specific comparisons to consider.

  • You can compare the results of traders who buy and sell stocks (i.e., mutual funds, wealth managers, individual investors etc.) Relative performance depends on the ability to pick the right stocks for investment. 
  • You can compare an investment system that adopts a specific strategy with similar investments that do not use any strategy, other than buying/selling stocks.

Choosing Stocks

When a mutual fund boasts about how well it has done in the past, the only valid conclusion that can be drawn is that the fund management team -- in the past -- was either lucky or talented when it comes to stock selection. However, market conditions change, management team change, and there is no reason to believe that funds which performed well in recent years will continue to do so in the future.Therefore, when it comes to choosing an investment based on history:

There is no reliable way to know -- in advance -- which fund, manager, or trader will beat the market averages in the future.
 
A handful of talented traders consistently beat the market averages. However, studies show that most individual investors under-perform those averages

One thing is true for every trader/investor. The fees (management fees, commissions on both buy and sell orders) charged by most mutual funds are too high, and those fees represent a huge obstacle for active traders in their attempt to achieve market-beating results. 

Thus, I recommend that individual investors adopt option strategies to reduce risk and to enhance investment returns.

 

Choosing Option Strategies

When choosing an option strategy, there is no reason why one trader would achieve better results than another -- as long as the same strict rules are followed. NOTE: Of course you must apply good judgment and trade an appropriate position size to prevent getting hurt during a drawdown

Tracking Specific Option Strategies: The Benchmark Indexes

On Aug 3, 2015, the CBOE introduced 10 new benchmark indexes, allowing you to compare the relative performance of specific strategies. 

The results are not influenced by trading judgment because the trading rules are strict. You can compare one strategy with others and learn how well (or poorly) your strategy did over a span of 29 years. If you prefer, you can make the comparison over a more narrow time frame to see how each method performed during bull or bear (or neutral) markets.

Previously, we discussed the Buy-Write Indexes BXM and BXY which represent the covered call writing strategy. We also looked at PUT, which adheres to a put writing strategy. Now there are additional indexes that allow traders to examine the performance of other option strategies. Data is available from June 30, 1986, and is updated daily.


Description of the new indexes ( modified from the CBOE Website).
 

  1. CBOE S&P 500 Multi-Week BuyWrite Index (BXMW)

Tracks the performance of a weekly covered call strategy with staggered short positions that expire over the next four consecutive weeks. The Index is constructed as a combined portfolio of four mini BuyWrite indexes. Expiration dates are staggered and the Index sells four-week options on a rolling weekly basis.

  2. CBOE S&P 500 One-Week PutWrite Index (WPUT)

Tracks the performance of a strategy that sells an at-the-money (ATM) S&P 500 Index (SPX) put option every week -- and the option is always one week to expiry. The written SPX put option is fully collateralized by a money market account (i.e., there is enough cash to meet the margin requirement for naked puts).

  3. CBOE S&P 500 Zero-Cost Put Spread Collar Index (CLLZ)

Tracks the performance of a low volatility strategy that 1) holds a long position indexed to the S&P 500 Index; 2) on a monthly basis buys a 2.5% – 5% S&P 500 Index (SPX) put option spread; and 3) sells a monthly out-of-the-money (OTM) SPX call option to fully cover the cost of the put spread.

  4. CBOE S&P 500 Iron Condor Index (CNDR)

Tracks the performance of a hypothetical option trading strategy that 1) sells a rolling monthly out-of-the-money (OTM) S&P 500 Index (SPX) put option (delta ≈ – 0.15) and a rolling monthly out-of-the-money (OTM) SPX call option (delta ≈ +0.15); 2) buys a rolling monthly OTM SPX put option (delta ≈ – 0.05) and a rolling monthly OTM SPX call option (delta ≈ +0.05); and 3) holds a fixed income account which is rebalanced on option roll days to limit downside returns.

  5. CBOE S&P 500 Iron Butterfly Index (BFLY)

Tracks the performance of a hypothetical option trading strategy that 1) sells a rolling monthly at-the-money (ATM) S&P 500 Index (SPX) put and call option; 2) buys a rolling monthly 5% out-of-the-money (OTM) SPX put and call option; and 3) holds a fixed income account which is rebalanced on the option roll day to limit downside returns.

  6. CBOE VIX Strangle Index (STGV)

Designed as a premium capture index, it overlays short CBOE Volatility Index (VIX) call and put options with a capped long VIX call option position. The position is collateralized by fixing the number of strangles such that 80% of capital is reserved. 

  7. CBOE S&P 500 Covered Combo Index (CMBO)

Tracks the performance of a “short strangle” strategy. The CMBO Index sells a monthly at-the-money (ATM) S&P 500 Index (SPX) put option and a monthly 2% out-of-the-money (OTM) SPX call option. The short put position is fully collateralized by the money market account and the 2% OTM SPX call is collateralized by a long SPX Index position. NOTE: This is NOT a naked strangle; it is a COVERED strangle.

  8. CBOE S&P 500 5% Put Protection Index (PPUT)

Tracks the performance of a strategy that holds a long position indexed to the S&P 500 Index and buys a monthly 5% out-of-the-money (OTM) S&P 500 Index (SPX) put option as a hedge.

  9. CBOE S&P 500 30-Delta BuyWrite Index (BXMD)

Tracks the performance of a strategy that holds a long position indexed to the S&P 500 Index and sells a monthly out-of-the-money (OTM) S&P 500 Index (SPX) call option nearest to 30 Delta -- at 10:00 a.m. CT on the Roll Date.  The Index rolls on a monthly basis, typically every third Friday of the month.

  10. CBOE S&P 500 Conditional BuyWrite Index (BXMC)

Tracks the performance of a yield-enhancement strategy that holds a long position indexed to the S&P 500 Index and sells a monthly at-the-money (ATM) S&P 500 Index (SPX) call option. The written number of ATM call options will be either ½ unit or 1 unit and will be determined by the level of the CBOE Volatility Index (VIX Index) when the call option is written on the Roll Date. The BXMC Index rolls on a monthly basis, typically every third Friday of the month.

The collar strategy is also tracked by a benchmark index (CLL).