Introduction

The Cboe S&P 500 Market-Neutral Volatility Risk Premia Optimized Index (the "Index") is part of the family of Volatility Risk Premia Index Series.

The Index is designed to provide a variable level of monthly premium income that captures the “volatility risk premium” in standardized options on the S&P 500 Index and has low correlation (is directionally neutral) to monthly returns of the US large cap stocks and US fixed income markets. The "volatility risk premium” in S&P 500 Index Options is based on the premise that the expected level of volatility of the S&P 500 Index priced into such options (the options’ “implied volatility”) is, on average, higher than the volatility actually experienced by the S&P 500 Index (the “realized volatility”). The ticker for the Index is “SVRPO”.

The SVRPO Index was launched on 5/29/2018 (the “launch date”).

The strategy for capturing the volatility risk premium in S&P 500 Index options includes selling one-month S&P 500 Index call and put options and buying one-month S&P 500 Index call and put options with a lesser value.

The Index is part of the Index series that includes:

• Cboe S&P 500 Market-Neutral Volatility Risk Premia Index (SVRP)
• Cboe S&P 500 Market-Neutral Volatility Risk Premia Optimized Index (SVRPO)

 

Target Outcome Returns

The Index is part of the family of Target Outcome Indices. Many investments target speculative returns, with uncertain levels of risk, over an uncertain period of time. While opportunistic, this approach to investing brings a high degree of uncertainty. Target Outcome Indexes encourage targeting a specific defined return or "payoff", with an allowance for a specific defined risk, at a specific point in time in the future.

Market-Neutral Volatility Risk Premia Option Strategy

The Index captures the volatility risk premium by selling one-month call and put S&P 500 Index Options (“Sold SPX Options”) and buying an identical number of one-month call and put S&P 500 Index Options (together, the “Bought SPX Options”) with a lesser market value (i.e., buying call options with a higher strike price and put options with a lower strike price).[1] The strike prices for the Sold SPX Options will be “out-of-the-money” (i.e., the strike price of the sold put options will be less than the level of S&P 500 Index and the strike price of the sold call options will be more than the level of the S&P 500 Index). The strike prices for the Bought SPX Options will be higher and lower, respectively, than the strike price for the Sold SPX Options, which offsets some of the Index’s risk from the Sold SPX Options. The difference between the strike prices of the Sold SPX Options and the Bought SPX Options represents the net liability for the Index, and the Index maintains an allocation to one- and three-month Treasury bills at least equal to such net liability. The Index receives premiums from the sale of the Sold SPX Options and pays premiums to buy the Bought SPX Options. The Index invests the net premium difference between the Sold SPX Options and the Bought SPX Options in one- and three-month Treasury bills. The Index holds each option until its expiration.

If the value of the S&P 500 Index rises above the strike price of the put S&P 500 Index Options (the “SPX Puts”) or falls below the strike price of the call S&P 500 Index Options (the “SPX Calls”) sold by the Index, the Sold SPX Options will not be exercised and will expire worthless, resulting in a gain to the Index equal to the premiums received from the Sold SPX Options. If the value of the S&P 500 Index falls below the strike price of the SPX Puts or rises above the strike price of the SPX Calls sold by the Index, the Sold SPX Options will finish “in-the-money” and the Index incurs a loss equal to the difference between the Sold SPX Options’ strike price and the value of the S&P 500 Index, less the value of the premiums received from the Sold SPX Options.

If the value of the S&P 500 Index rises above the strike price of the SPX Puts or falls below the strike price of the SPX Calls bought by the Index, the Bought SPX Options will not be exercised and will expire worthless, resulting in a loss to the Index equal to the premiums paid for the Bought SPX Options. If the value of the S&P 500 Index falls below the strike price of the SPX Puts or rises above the strike price of the SPX Calls sold by the Index, the Bought SPX Options will finish “in-the-money” and the Index receives a gain equal to the difference between the Bought SPX Options’ strike price and the value of the S&P 500 Index, less the value of the premiums paid for the Bought SPX Options.

The strike prices of the SPX Puts and SPX Calls are calculated to attempt to meet two objectives:

• Receive a target level of premium income through the sale and purchase of options.
• Reduce the possibility of loss from settlement of the options due to the price return of S&P 500^® Index at month's end.

The cash and net option premium proceeds will be invested in short-term Treasury bills which will be rolled at maturity. This makes the Index bond-market-neutral, meaning that as interest rates and the yield for Treasury bills go up or down, the short duration of the Treasury bills will result in minimal effect on the Index.

Indexes described on this web page are designed to represent proposed hypothetical options strategies. The actual performance of investment vehicles such as mutual funds or managed accounts can have significant differences from the performance of the Indexes. Investors attempting to replicate the Indexes should discuss with their advisors possible timing and liquidity issues. Like many passive benchmarks, the Indexes do not consider significant factors such as transaction costs and taxes. Transaction costs and taxes for strategies such as the Indexes could be significantly higher than transaction costs for a passive strategy of buying-and-holding stocks. Investors should consult their tax advisor as to how taxes affect the outcome of contemplated options transactions. Past performance does not guarantee future results. This web page contains index performance data based on back-testing, i.e., calculations of how the index might have performed prior to launch. Back-tested performance information is purely hypothetical and is provided in this web page solely for informational purposes. Back-tested performance does not represent actual performance and should not be interpreted as an indication of actual performance. It is not possible to invest directly in an index. Cboe calculates and disseminates the Indexes. Supporting documentation for any claims, comparisons, statistics or other technical data is available from Cboe upon request. The methodologies of the Indexes are the property of Cboe Options Exchange, Incorporated (Cboe).