New Study Finds Russell 2000 Index Options Benchmarks and Options-Based Funds Less Volatile


CBOE.com – Chicago, IL and County Wicklow, Ireland – Chicago Board Options Exchange® (CBOE®) and Fund Evaluation Group, LLC (FEG) 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.

“Comparable to similar studies conducted in the past,” Oyster said, “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 percent that year, compared with a 33.8 percent 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.

About CBOE Benchmarks
Since 2002, CBOE has been a worldwide leader in creating benchmark indexes designed to help investors track the performance of investment strategies that use options or volatility products to help manage risk and enhance yield. CBOE currently publishes data on more than 30 strategy performance benchmark indexes, including BXM, PUTR and the CBOE VIX Tail Hedge Index (VXTH).  Links to the new paper, as well as additional information on all of CBOE’s strategy performance benchmark indexes, can be found at www.cboe.com/benchmarks.

About CBOE
CBOE, the largest U.S. options exchange and creator of listed options, continues to set the bar for options and volatility trading through product innovation, trading technology and investor education. CBOE Holdings offers equity, index and ETP options, including proprietary products, such as options and futures on the CBOE Volatility Index (VIX Index) and S&P 500 options (SPX), the most active U.S. index option.  Other products engineered by CBOE include equity options, security index options, Weeklys options, FLEX options and benchmark products such as the CBOE S&P 500 BuyWrite Index (BXM). CBOE Holdings is home to the world-renowned Options Institute, Livevol options analytics and data tools, and www.cboe.com, the go-to place for options and volatility trading resources.

About FEG
Fund Evaluation Group, LLC (FEG) provides investment consulting, portfolio management, and research services to clients nationwide. Established in 1988, the independently owned firm has approximately $53 billion in total client assets under advisement (for full disclosures visit: www.feg.com/disclosures). FEG service lines include FEG Consulting, which provides traditional, non-discretionary investment consulting services to institutions; FEG OCIO, which provides outsourced CIO and discretionary portfolio management services for institutions and financial intermediaries; and FEG Research, which provides traditional and alternative strategies’ investment manager research, due diligence and monitoring.

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