Track Option Strategy Performance with These 27 Indexes from the CBOE

A little over a year ago now the CBOE released its first round of options-based strategy performance benchmark indexes. They’ve slowly increased the number of trackable option strategies on their website. Each strategy index is "designed to highlight the long-term utility of options as risk management and yield enhancing investment tools” and really helps bring some context to options trading for the little guys like you and me.

The indexes include the SPX Covered Combo Strangle, VIX Tail-Risk Hedge, SPX Protective Puts, and the SPX Monthly vs. Weekly Put Selling showdown. Plus, I’ll give you a little more information on some the options backtesting we’ve been doing here at Option Alpha and the up-coming release of our proprietary backtesting software soon.

CBOE S&P 500 Iron Condor Index (CNDR)

• Designed to track a hypothetical iron condor.
• Sell monthly out of the money S&P 500 put options at about the 20 Delta, and then roughly an S&P 500 out of the money call option at about 20 Delta.
• Then buy the 5 Delta on either end — the long legs on either end.
• Repeat monthly or 12 times out of the year, designed to keep the neutral iron condor going every single month.
• Results: does not work that well on a long-term basis. Dramatically underperforms the S&P 500.
• At Option Alpha we back-tested this similar strategy but used a daily condor instead of monthly.
• Found that if you increase the frequency and decrease the trade size, performance was four times greater than the regular iron condor on a monthly basis.

CBOE S&P 500 Covered Combo Index (CMBO)

• A long position in the S&P or SPY, hypothetically entering another short strangle overtop of that.
• Selling the 2% out of the money call option, and an at the money put option — combining the PutWrite and CallWrite strategies in S&P 500 to create a combo covered index.
• Do it on a monthly basis, and roll the contract from month-to-month.
• The combo performance is dramatically better than some of the iron condors, and some of the iron butterflies strategies they have.
• Still not at the level that just the pure covered call is at — requires a lot more premium to hold that position, so you have to recalibrate the returns.
• Definitely, a strategy that saw much less overall volatility in its returns.
  Although it did not make as much money as the S&P 500 covered call did, it had a much smoother equity curve.

CBOE S&P 500 Weekly PutWrite Indexes (WPUT) & Monthly PutWrite Indexes (PUT)

• Tested the PutWrite Index for the S&P 500 and the Russell. Tested a weekly contract, rolling every week versus a monthly contract rolling every ] week.
• Found that the annual premium income collected was 24% of the equity price for the monthly put options and 39.3% on an annual basis for the weekly options.
• The weekly put options, although they were smaller, collected a lot more of aggregate premiums. The sum premiums of the four weekly put options produced a higher aggregated amount.
• Comparing long-term performance for the monthly put options versus the weekly put options, the monthly put options performed better — the monthly put options returned 6.59% annual compound rate and the weekly put options returned 5.61%.
• This means that the weekly option collected more money but the monthly put options kept more money over the long-term.
• When you start to factor in commissions for trades, one trade per month is better than four trades per month.
• Standard deviation or volatility risk in the portfolio for the monthly put options was 11.51% and 9.85% for the weekly.
• Volatility for the S&P 500 on average was 15.11%, so in either case, you have less volatility than the market and a smoother equity curve.
• However, there was a larger drawdown at it's largest point — no weekly options to average out the draw-downs.

CBOE VIX Tail Hedge Index (VXTH)

• Designed to simulate buying and holding the S&P 500, and then buying a one-month 30 Delta call option on the VIX and keep producing the 30 Delta call options.
• This is to protect your portfolio of the tail risk of a huge black swan event.
• Theoretically, if the black swan event happens there will be a huge spike in volatility and the call option will make a lot of money to protect the downside exposure in the S&P 500.
• The S&P 500 dramatically out-performed buying this continuous protection for your portfolio on a re-occurring basis.
• The protection helped during certain periods of time by buffering the portfolio during a market crash or downturn.
• But the constant reoccurring purchase to buy calls every month on the VIX actually dramatically reduces your performance.
• Over a 5-year period, the VIX tail hedge produced a return of 43.74% versus the S&P 500 at 68.12%. This disparity is the cost of insuring your portfolio — have to give up something to insure your portfolio against the downside risk (see episode 49 for best strategies for buying put options into a crash).

CBOE S&P 500 5% Put Protection Option (PPUT)

• Designed to track the performance of a long S&P 500, and also buys a monthly 5% out of the money put option on the S&P 500 as a hedge — generic put protection for your portfolio.
• Using the Put Protection option, your portfolio makes $664 on a $100 investment. Doing a simple covered call instead, you would have made $2,096 per $100 invest — huge disparity in performance.
• The Put Protection option creates a cost center for your portfolio, an insurance charge that dramatically reduces your returns long term.

Overall, you have to determine the most important metrics to you personally as a trader when making strategy decisions: win-rate? Draw-down? Equity curve? Growth?