New study finds CBOE Russell 2000 index options benchmarks and options-based funds less volatile

Chicago Board Options Exchange (NASDAQ:CBOE) and Fund Evaluation Group, LLC (FEG) have announced findings from a study of four CBOE strategy performance benchmark indexes designed to track the performance of positions in Russell 2000 (RUT) index options, looking at various aspects of their performance over a 15-year period spanning 2001 through 2016. The study was presented Monday during a session at CBOE’s Risk Management Conference Europe, currently taking place in County Wicklow, Ireland.

The study, “Evaluating Options for Enhanced Risk-Adjusted Returns: CBOE Russell 2000 Option Benchmark Suite and Case Studies on Fund Use of Options,” was commissioned by CBOE and written by Michael J. Oyster, CFA, FEG’s chief investment strategist.

Michael J. Oyster, CFA

Michael J. Oyster, CFA

Oyster stated:

Comparable to similar studies conducted in the past, our analysis of the suite of CBOE Russell 2000 Options Indexes suggests that the monetization of the equity risk premium through options-based strategies can enhance risk-adjusted returns relative to long-only equity benchmarks.”

The FEG analysis found that, despite a strong U.S. stock market rally concurrent with the period studied, the CBOE Russell 2000 PutWrite Index (PUTR) had higher returns and lower volatility than the underlying Russell 2000 stock index.

FEG also evaluated the performance of the CBOE Russell 2000 BuyWrite Index (BXR), CBOE Russell 2000 30-Delta BuyWrite Index (BXRD) and CBOE Russell 2000 Zero-Cost Put Spread Collar Index (CLLR). In addition to the four benchmark indexes, a targeted analysis of the CBOE Russell 2000 One-Week PutWrite Index (WPTR) also was conducted. With the exception of the PUTR, the returns posted by most of the CBOE Russell 2000 options-based strategy benchmark indexes lagged the Russell 2000 Index over the period studied, but did so with lower volatility.

Researchers noted that while the PUTR was not immune to the volatility pressures that hit many financial assets during the 2008 financial crisis, it performed better than the Russell 2000 Index, declining by 28.5% that year, compared with a 33.8% drop by the Russell 2000 Index.

Other key findings include:

  • Richly Priced Index Options: The study found that there was a volatility risk premium for RUT options; implied volatility exceeded realized volatility by 3.3 volatility points. This premium facilitated strong risk-adjusted returns by the PUTR that measures sales of RUT puts every month.
  • Lower Volatility: The CBOE Russell 2000 options-based strategy benchmark indexes exhibited much lower standard deviations and less severe drawdowns than the underlying long-only equity index.
  • Enhanced Returns: The inclusion of the PUTR in a stock/bond portfolio would have improved risk-adjusted returns.
  • Case Study – Reduced Risk: Options-writing mutual funds as a combined group had less than half the volatility of the stock indexes studied.

Evaluating Options for Enhanced Rick-Adjusted Returns: CBOE Russell 2000 Option Benchmark Suite and Case Studies on Fund Use of Options,” is the latest in a series of more than a dozen CBOE-sponsored studies that analyze the long-term performance of options-based benchmark indexes.

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