Bookmark and Share 17, Callan Evaluation of BXM vs S&P 500

Callan Associates evaluated the CBOE S&P 500 BuyWrite (BXM) Index, building on the research done by Ibbotson in 2004. Return, risk and risk-adjusted performance were examined over an extended period and through cycles of up and down equity markets.

Summary Of Results

The results show that the BXM Index generated superior risk-adjusted returns over the 18-year study, generating a return comparable to that of the S&P 500 at approximately two-thirds of the risk. The compound annual return of the BXM Index from June 1, 1988, thru August 31, 2006, was 11.77 percent, compared to 11.67 percent for the S&P 500. The BXM returns were generated with a standard deviation of 9.29%, two-thirds of the 13.89% volatility of the S&P 500.

Cumulative results are dependent on the time period selected for evaluation, so Callan examined performance over individual years, over rolling five-year periods, and through up and down cycles in the equity markets.

The BXM clearly underperformed the S&P 500 during the run-up in the equity market in the second half of the 1990s, and just as clearly outperformed the S&P 500 during the market downturn from April 2000 through March 2003.

The BXM generates a return pattern different from that of the S&P 500, offering a source of potential diversification. The addition of the BXM to a diversified investor portfolio would have generated significant improvement in risk-adjusted performance during the 18-year study.

Better returns:

Callan case study BXM compound annual returns 1988-2006

Lower risk (standard deviation):

Callan case study BXM standard deviation 1988-2006

Comparisons of Returns and Standard Deviations

During the period studied, June 1988 to August 2006, the BXM Index had:

  1. Slightly higher returns with substantially lower volatility than the S&P 500 and Russell 2000 stock indexes. Returns are markedly higher than those of the MSCI EAFE index.
  2. Higher returns and higher volatility than the Lehman Aggregate bond index and 90-day Treasury bills.
  3. Higher risk-adjusted returns than the S&P 500 as measured by both the Sharpe Ratio and the Stutzer Index. The Stutzer Index is a measure of portfolio efficiency that takes into account the negative skew evident in the BXM returns.
  4. Lower returns than the S&P 500 in strong equity markets but clearly superior returns in down markets. A monthly buy-write strategy collects premium income but has a truncated monthly upside when the option is exercised above the strike price. Therefore, the buy-write strategy is expected to outperform a pure passive stock index strategy in bear markets and under-perform the purely passive stock index in bull markets.

Calendar Year Returns

Comparing the BXM vs S&P 500 each year from 1988 to 2006, where BXM is in green and S&P 500 is in blue, we see that BXM didn't make as much in good years like 1995, but also didn't lose as much in bad years like 2002:

Callan calendar year returns BXM and S&P500, 1988-2006

For more data, download the Callan Associates evaluation of BXM Buy-Write Options Strategy.

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