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CBOE Rolls Out Index for Fans of Put Options IF THERE'S ONE options strategy that's nearly universally loved among investors, it's selling put options. Of course, they only love it when premiums are pricey and stocks are rising because then they get to keep the money. When stock prices are headed south, selling puts, or recommending put selling, has been likened to picking up nickels before bulldozers. Until now, put selling has lacked a benchmark index. But the Chicago Board Options Exchange has just introduced the S&P 500 PutWrite Index (the ticker is PUT), which measures the performance of a hypothetical portfolio that sells S&P 500 index (SPX) put options against collateralized cash reserves held in a money-market account. The index is similar to CBOE's S&P 500 BuyWrite Index (ticker BXM), which measures the performance of a hypothetical portfolio that sells SPX call options against a long portfolio of the stocks in the S&P 500 index. Most investors sell puts against stocks that they think will rise in value, and that they wouldn't mind owning if the stock price declined below the puts' strike price. This trade is one of the mainstays in the options market. Some investors have been selling puts for years with great success, though of course they also have known margin calls when the market moved against them. This is how the PUT strategy works: Investors sell a sequence of one-month, at-the-money S&P 500 index puts. The cash received is invested in one- and three-month Treasury bills. The number of puts sold varies from month to month, but is limited so that the amount held in Treasurys can finance the maximum possible loss from final settlement of SPX puts. In the worst-case scenario, the amount at risk for the PUT investor is limited to the amount that was invested. The number of puts sold increases with Treasury rates and the price of the put, and decreases with the strike price of the put. Selling index puts isn't recognized as a particularly widespread trading strategy, especially for individual investors, but perhaps it soon will be thanks to CBOE's new benchmark index. The PutWrite is expected to appeal to asset managers who have cash reserves and are looking for higher returns. And that means it's only a matter of time before CBOE licenses the PutWrite index to investment firms that will create similar products for investors. Currently, there's an estimated $30 billion allocated to more than 45 buy-write investment products that have been launched since the 2002 introduction of the BXM Index, which is CBOE's S&P 500 BuyWrite Index, according to CBOE Chairman and CEO William J. Brodsky. Key points about the PutWrite Index, based on research from June 1, 1988, through May 31, 2007, include: Higher Returns. PUT's annualized return was 12.6%, compared to 12.1% for the S&P 500 Total Return Index (ticker SPTR), 11.8% for the BXM and 4.7% for three-month Treasury bills. Lower Volatility. PUT's standard deviation was smaller than BXM and S&P 500 index. The standard deviation of the monthly returns for PUT was about 61% of the S&P 500 index. Performance in Different Types of Markets. Buy-write strategies often perform well in markets with negative or slowly rising returns. The PutWrite strategy performs well in a flat or downward trending market, and historically had its best performance during periods of higher volatility. Total Growth. The PUT Index was set to 100 at its base date of June 1, 1988, and it rose to 961.10 by May 31, 2007, 861% increase, compared to a 731% increase for BXM over the same time period. Monthly rates of return and standard deviation (or volatility) from June 1988 to the end of April 2007: Ticker Symbol Index Annualized Returns Standard Deviation CBOE will calculate the PUT value at the end of each trading day and disseminate it on the CBOE web site and to options quote vendors. On any given date, the index represents the value of the initial $100 invested in the PUT strategy at inception. At the close of every business date, the value of the PUT is equal to the value of the Treasury bill account, less the mark-to-market value of the puts. |
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