CBOE S&P 500 BuyWrite Index

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In April 2002, Chicago Board Options Exchange (CBOE) began disseminating the first of several new benchmark indexes to measure the performance of a buy-write strategy, CBOE BuyWrite Monthly Index, (ticker symbol BXM). The BXM Index later was renamed the CBOE S&P 500 BuyWrite Index. The BXM is a benchmark index that measures potential returns of a theoretical portfolio of Standard & Poor's 500 Index stocks that also systematically sells S&P 500 Index call options (SPX) against the portfolio.

1 Buy-Writes Explained
2 Other Buy-Write Indexes
3 Awards
4 Futures
5 Resources
6 References

Buy-Writes Explained

A "buy-write," also called a covered call, generally is considered to be an investment strategy in which an investor buys a stock or a basket of stocks, and also sells call options that correspond to the stock or basket of stocks. This strategy can be used to enhance portfolio returns and reduce volatility.

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As an example, the BXM is a passive total return index based on selling the near-term, at-the-money S&P 500 Index (SPX) call option against the S&P 500 stock index portfolio each month, on the day the current contract expires. The SPX call that is sold (or written) will have one month remaining to expiration, with an exercise price just above the prevailing index level (i.e., slightly out-of-the-money). The premium collected from the sale of the call is added to the portfolio's total value. The SPX call is held until its expiration, at which time a new one-month, at-the-money call is written. The expired option, if exercised, is settled in cash.

CBOE developed the BXM and other Buy-Write indexes in response to customer demand for a quantified performance measure of the buy-write strategy. Historical values for the BXM were calculated by CBOE and are available dating back to June 1988. Comparisons of the BXM to the S&P 500 Total Return Index also are available.

According to CBOE Chairman William J. Brodsky, portfolio managers for more than 25 years have employed buy-write strategies to provide incremental income to boost risk-adjusted returns and provide a cushion against downside losses.

"The CBOE BuyWrite Monthly Index not only provides the first objective benchmark with which to assess managed buy-write fund performance but also serves to illustrate the risk/return management properties of hedged equity strategies in general," said Professor of Finance Robert Whaley. Whaley is professor of finance at the Fuqua School of Business at Duke University and was instrumental in the development of the BXM. Whaley is also known for his work on the creation of CBOE's volatility indexes, VIX and VXN.

CBOE Buy-Write indexes are calculated and disseminated on a daily basis, using closing prices of the the respective cash index and the closing price of the selected option call. Buy-write levels can be accessed through the CBOE website at www.cboe.com/quotes, or anywhere that stock and option quotes are available.^[1]

Other Buy-Write Indexes

Subsequent to the introduction of the BXM, four other CBOE buy-write indexes were introduced:

CBOE S&P 500 2% OTM BuyWrite Index - BXY
CBOE DJIA BuyWrite Index - BXD
CBOE NASDAQ-100 BuyWrite Index - BXN
CBOE Russell 2000 BuyWrite Index - BXR

Awards

In December 2004 at the Super Bowl of Indexing Conference, CBOE was awarded the Most Innovative Benchmark Index distinction for the CBOE S&P 500 BuyWrite Index (BXM).

Futures

On October 2, 2006, CBOE S&P 500 BuyWrite Index Futures were listed on the CBOE Futures Exchange (CFE).

Resources

CBOE Buy-Write information Microsite

Callan Associates. An Historical Evaluation of the CBOE S&P 500 BuyWrite Index (BXM). (Oct. 2006).

Ibbotson Associates. Feldman, Barry, and Dhruv Roy, "Passive Options-Based Investment Strategies: The Case of the CBOE S&P 500 BuyWrite Index." The Journal of Investing. (Summer 2005).