CBOE Holdings, Inc. (NASDAQ: CBOE) just announced it has launched the CBOE S&P 500 Dividend Aristocrats Target Income Index (SPAI), a benchmark index designed to track the hypothetical performance of a partial buy-write strategy applied to stocks contained in the widely utilized S&P 500 Dividend Aristocrats Index, to target a specific level of total income.
The S&P 500 Dividend Aristocrats Index, constructed and maintained by S&P Dow Jones Indices, targets companies that are currently members of the S&P 500® Index, have increased dividend payments each year for at least 25 years, and meet certain other market capitalization and liquidity requirements.
The primary goal of the SPAI Index, the latest addition to CBOE’s suite of Target Outcome Indexes, is to target an annualized level of income that is approximately 3.5 percent over the annual dividend yield of the S&P 500 Index. The current income target of SPAI is approximately 5.5 percent. A secondary goal of the SPAI Index is to generate price returns that are proportional to those of the S&P 500 Index.
Stocks of companies that increase their dividends year-over-year exhibit both potential capital growth and future dividend income characteristics, but they may not produce as much current income as the investor wants,” said Bruce Traan, Director of Information Solutions at CBOE. “The SPAI Index employs a target-income partial-overwrite strategy that converts a portion of the capital appreciation into additional income.
The SPAI Index investment strategy includes buying all stocks that currently have options listed on CBOE that are contained in the S&P 500 Dividend Aristocrats Index, and partially “writing” (or selling) Weekly covered call options on each stock, generally on the last trading day of each week. The number of call options overwritten per unit of stock exposure is varied weekly with the goal of generating a higher total yield from dividends and call option premiums that is 3.5 percent above the yield from dividends of the S&P 500 Index. The percentage of each stock that is overwritten with call options will by design always be less than 20 percent.
Weekly options are key to the strategy, because they are designed to deliver more total premium than selling longer-dated options over the same period of time. This results in a lower level of overwrite for the same level of premium income, which in comparison to full buy-write strategies, means less restriction for growth from price appreciation.