Description of the CBOE S&P 500 BuyWrite Index (BXM SM )

Transcription

1 Descripion of he CBOE S&P 500 BuyWrie Index (BXM SM ) Inroducion. The CBOE S&P 500 BuyWrie Index (BXM) is a benchmark index designed o rack he performance of a hypoheical buy-wrie sraegy on he S&P 500 Index. Announced by he Chicago Board Opions Exchange (CBOE) in April 2002, he BXM Index was developed by he CBOE in cooperaion wih Sandard & Poor's. The BXM is a passive oal reurn index based on (1) buying an S&P 500 sock index porfolio, and (2) "wriing" (or selling) he near-erm S&P 500 Index (SPX SM ) "covered" call opion, generally on he hird Friday of each monh. To help in he developmen of he BXM Index, in 2001 he CBOE commissioned Professor Rober Whaley of Duke Universiy o compile and analyze relevan daa on a hypoheical buy-wrie sraegy on he S&P 500 Index. Professor Whaley developed a mehodology for he BXM index ha is spelled ou in his published paper "Risk and Reurn of he CBOE BuyWrie Monhly Index" The Journal of Derivaives (Winer 2002) pp (hereinafer referred o as he Whaley Paper ). Revisions o he BXM Index. The BXM Index iniially was referred o as he CBOE BuyWrie Monhly Index bu is name laer was changed o he CBOE S&P 500 BuyWrie Index. The Whaley Paper originally se an iniial value of for he BXM Index as of June 1, 1988, because ha was he dae on which Sandard & Poor s began reporing daily dividends for he S&P 500 Toal Reurn Index (SPTR). However, some invesors have suggesed ha he CBOE also provide hisorical daa for he BXM Index for he year 1987, and in June 2008 CBOE exended he early daily price series for he BXM Index back 23 more monhs so ha he new incepion dae for BXM price hisory now is June 30, To provide for coninuiy, he BXM Index sill has a price of on June 1, 1988, and all BXM prices for June 1988 and subsequen monhs remain unchanged. The closing price of he BXM Index on he revised incepion dae of June 30, 1986, is The daily closing hisorical price series for he BXM Index is available a he websie on Bloomberg erminals (a BXM <Index>), and from oher price quoe vendors. The BXM mehodology specified in he 2002 Whaley paper was used for he calculaion of he BXM Index in all monhs from June 1986 hrough April Beginning on May 21, 2004, he mehodology for he BXM was revised. On he hird Friday of he monh, he new S&P call opion generally was deemed sold a a price equal o he volume-weighed average of he raded prices ( VWAP ) of he new call opion during a half-hour period beginning a 11:30 a.m. Easern Time (ET). As of November 19, 2010, he VWAP period was exended from one-half hour o wo hours beginning a 11:30 a.m. and ending a 1:30 p.m. ET. The VWAP process is explained in greaer deail below. For more informaion on he BXM Index, please visi he websie or send an o insiuional@cboe.com.

2 Index Design. The CBOE S&P 500 BuyWrie Index (he BXM SM or he BXM Index SM ) measures he oal rae of reurn of a hypoheical covered call sraegy applied o he S&P 500 Composie Price Index (he S&P 500 Index ). This sraegy, which we refer o as he BXM covered call sraegy, consiss of a hypoheical porfolio consising of a long posiion indexed o he S&P 500 Index on which are deemed sold a succession of one-monh, a-he-money call opions on he S&P 500 Index lised on he Chicago Board Opions Exchange (CBOE). We refer o his hypoheical porfolio as he covered S&P 500 Index porfolio. The BXM Index provides a benchmark measure of he oal reurn performance of his hypoheical porfolio. Dividends paid on he componen socks underlying he S&P 500 Index and he dollar value of opion premium deemed received from he sold call opions are funcionally re-invesed in he covered S&P 500 Index porfolio. The BXM Index is based on he cumulaive gross rae of reurn of he covered S&P 500 Index porfolio since he incepion of he BXM Index on June 30, 1986, when i was se o an iniial value of The BXM covered call sraegy requires ha each S&P 500 Index call opion in he hypoheical porfolio be held o mauriy, generally he hird Friday of each monh. The call opion is seled agains he Special Opening Quoaion (or SOQ, icker SET ) of he S&P 500 Index used as he final selemen price of S&P 500 Index call opions 2. The SOQ is a special calculaion of he S&P 500 Index ha is compiled from he opening prices of componen socks underlying he S&P 500 Index. The SOQ calculaion is performed when all 500 socks underlying he S&P 500 Index have opened for rading, and is usually deermined before 11:00 a.m. ET 3. The final selemen price of he call opion a mauriy is he greaer of 0 and he difference beween he SOQ minus he srike price of he expiring call opion. Subsequen o he selemen of he expiring call opion, a new a-he-money call opion expiring in he nex monh is hen deemed wrien, or sold, a ransacion commonly referred o as a roll. The srike price of he new call opion is he S&P 500 Index call opion lised on he CBOE wih he closes srike price above he las value of he S&P 500 Index repored before 11:00 a.m. ET. For example, if he las S&P 500 Index value repored before 11:00 a.m. ET is and he closes lised S&P 500 Index call opion srike price above is 905, hen he 905 srike S&P 500 Index call opion is seleced as he new call opion o be incorporaed ino he BXM Index. The long S&P 500 Index componen and he shor call opion componen are held in equal noional amouns, i.e., he shor posiion in he call opion is covered by he long S&P 500 Index componen. Once he srike price of he new call opion has been idenified, he new call opion is deemed sold a a price equal o he volume-weighed average of he raded prices 1 The srike used for he calculaion on June 30, 1986 was seleced a he previous heoreical roll dae, June 20, As noed above, he value of he BXM on June 1, 1988, he previous incepion dae, remains If he hird Friday is an exchange holiday, he call opion will be seled agains he SOQ on he previous business day and he new call opion will be seleced on ha day as well. 3 If one or more socks in he S&P 500 Index do no open on he day he SOQ is calculaed, he final selemen price for SPX opions is deermined in accordance wih he Rules and By-Laws of he Opions Clearing Corporaion.

3 ( VWAP ) of he new call opion during he wo hour period beginning a 11:30 a.m. ET 4. The CBOE calculaes he VWAP in a wo-sep process: firs, he CBOE excludes rades in he new call opion beween 11:30 a.m. and 1:30 p.m. ET ha are idenified as having been execued as par of a spread, and hen he CBOE calculaes he weighed average of all remaining ransacion prices of he new call opion beween 11:30 a.m. and 1:30 p.m. ET, wih weighs equal o he fracion of oal non-spread volume ransaced a each price during his period. The source of he ransacion prices used in he calculaion of he VWAP is CBOE s Marke Daa Rerieval ( MDR ) Sysem 5. If no ransacions occur in he new call opion beween 11:30 a.m. and 1:30 p.m. ET, hen he new call opion is deemed sold a he las bid price repored before 1:30 p.m. ET. The value of opion premium deemed received from he new call opion is funcionally re-invesed in he porfolio. Index Calculaion. The BXM Index is calculaed by he CBOE once per day a he close of rading [for he respecive componens of he covered S&P 500 Index porfolio]. The BXM Index is a chained index, i.e., is value is equal o 100 imes he cumulaive produc of gross daily raes of reurn of he covered S&P 500 Index porfolio since he incepion dae of he BXM Index. On any given day, he BXM Index is calculaed as follows: BXM BXM (1 + R ) = 1 where R is he daily rae of reurn of he covered S&P 500 Index porfolio. This rae includes ordinary cash dividends paid on he socks underlying he S&P 500 Index ha rade ex-dividend on ha dae. On each rading day excluding roll daes, he daily gross rae of reurn of he BXM equals he change in he value of he componens of he covered S&P 500 Index porfolio, including he value of ordinary cash dividends payable on componen socks underlying he S&P 500 Index ha rade ex-dividend on ha dae, as measured from he close in rading on he preceding rading day. The gross daily rae of reurn is equal o: 1 + R S + Div C ) /( S C ) = ( 1 1 In his equaion, S is he closing value of he S&P 500 Index a dae, Div represens he ordinary cash dividends payable on he componen socks underlying he S&P 500 Index ha rade ex-dividend a dae expressed in S&P 500 Index poins, and C is he arihmeic average of he las bid and ask prices of he call opion repored before 4:00 p.m. ET a dae. S -1 is he closing value of he S&P 500 Index on he preceding rading 4 The iming of he roll and he price used o sell he new call have changed over ime. The monhly roll originally occurred a he close of rading on he hird Friday of he monh, i.e. he srike price of he new call was deermined a 4:00 p.m. EST, and he new call was deemed o be sold a he las bid price before 4:00 p.m. EST. Since Ocober 16, 1992, he call has been rolled a 11:00 a.m. insead. Since June 18, 2004, he new call has been deemed sold a he VWAP. This change was inended o faciliae execuion of he BXM covered call sraegy. 5 Time & Sales informaion from CBOE s MDR Sysem is disseminaed hrough he Opions Price Reporing Auhoriy (OPRA) and is publicly available hrough mos price quoe vendors.

4 day and C -1 is he average of he las bid and ask prices of he call opion repored before 4:00 p.m. ET on he preceding rading day. On roll daes, he gross daily rae of reurn is compounded from hree gross raes of reurn, he gross rae of reurn from he previous close o he ime he SOQ is deermined and he expiring call is seled; he gross rae of reurn from he SOQ o he iniiaion of he new call posiion and he gross rae of reurn from he ime he new call opion is deemed sold o he close of rading on he roll dae, expressed as follows: 1+ R = (1 + Ra ) (1 + Rb ) (1 + Rc ) where: 1+ a Sele 1 1 SOQ R = ( S + Div C ) /( S C ) ; VWAV SOQ 1+ R = ( S ) /( S ) ; and b VWAV 1+ Rc = ( S C ) /( S CVWAP ) In his equaion, R a is he rae of reurn of he covered S&P 500 Index porfolio from he previous close of rading hrough he selemen of he expiring call opion. S SOQ is he Special Opening Quoaion used in deermining he selemen price of he expiring call opion. As previously defined, Div represens dividends on S&P 500 Index componen socks deermined in he same manner as on non-roll daes, and C Sele is he final selemen price of he expiring call opion. S -1 and C -1 are deermined in he same manner as on non-roll daes. R b is he rae of reurn of he un-covered S&P 500 Index porfolio from he selemen of he expiring opion o he ime he new call opion is deemed sold. S VWAV is he volumeweighed average value of he S&P Index based on he same ime and weighs used o calculae he VWAP in he new call opion. R c is he rae of reurn of he covered S&P 500 Index porfolio from he ime he new call opion is deemed sold o he close of rading on he roll dae. As defined above, S VWAV is he is he volume-weighed average value of he S&P Index based on he same ime and weighs used o calculae he VWAP in he new call opion. C VWAP is he volumeweighed average rading price of he new call opion beween 11:30 a.m. and 1:30 p.m. ET and C refers o he average bid/ask quoe of he new call opion repored before 4:00 p.m. ET on he roll dae.

5 The CBOE S&P 500 BuyWrie Index (BXM SM ) is designed o represen a proposed hypoheical buy-wrie sraegy. Like many passive indexes, he BXM Index does no ake ino accoun significan facors such as ransacion coss and axes and, because of facors such as hese, many or mos invesors should be expeced o underperform passive indexes. In he consrucion of he hypoheical BXM index, he SPX calls are assumed o be wrien a a cerain price on he hird Friday of he monh. However, here is no guaranee ha all invesors will be able o sell a his price, and invesors aemping o replicae he BXM Index should discuss wih heir brokers possible iming and liquidiy issues. Transacion coss for a buy-wrie sraegy such as he BXM could be significanly higher han ransacion coss for a passive sraegy of buying-and-holding socks. Pas performance does no guaranee fuure resuls. Sandard & Poor's, S&P, and S&P 500 are regisered rademarks of The McGraw-Hill Companies, Inc. and are licensed for use by he Chicago Board Opions Exchange, Incorporaed (CBOE). CBOE, no S&P, calculaes and disseminaes he BXM Index. CBOE and Chicago Board Opions Exchange are regisered rademarks of he CBOE, and SPXSM, and BXMSM is a servicemark of he CBOE. The mehodology of he CBOE S&P 500 BuyWrie Index is owned by CBOE and may be covered by one or more paens or pending paen applicaions. Opions involve risk and are no suiable for all invesors. Prior o buying or selling an opion, a person mus receive a copy of Characerisics and Risks of Sandardized Opions (ODD). Copies of he ODD are available from your broker, by calling OPTIONS, or from The Opions Clearing Corporaion, One Norh Wacker Drive, Suie 500, Chicago, Illinois Supporing documenaion for claims, comparisons, recommendaions, saisics or oher echnical daa is available by calling OPTIONS, sending an o help@cboe.com, or by visiing