Cboe DJIA BuyWrite Index (BXD)

The Cboe DJIA BuyWrite Index^SM (BXD) is a benchmark index that measures the performance of a theoretical portfolio that sells DJX call options, against a portfolio of the stocks included in the Dow Jones Industrial Average^SM  (the Dow).

Buy-Write strategies provide option premium income that can help cushion downside moves in an equity portfolio, but Buy-Writes often under perform stocks in rising markets. Thus, some Buy-Write strategies significantly outperformed stocks in 2000 - 2002 when the DJIA year-end price fell three years in a row, but Buy-Writes tended to underperform stocks in the late 1990s when the DJIA rose by more than 15% per year. Buy-Write strategies have an added attraction to some investors in that Buy-Writes can help lessen the overall volatility in many portfolios.

The Cboe DJIA BuyWrite Index (BXD) is a benchmark index designed to track the performance of a hypothetical buy-write strategy on the DJIA. Announced in 2005, the BXD Index was created by Cboe under an agreement with Dow Jones & Company, Inc., and is based on prices of Options on the Dow (DJX), traded at Cboe. The BXD is a passive total return index based on (1) buying a DJIA stock index portfolio, and (2) "writing" (or selling) the near-term DJX Index "covered" call option, generally on the third Friday of each month. The DJX call written will have about one month remaining to expiration, with an exercise price just above the prevailing index level (i.e., slightly out of the money). The DJX call is held until expiration and cash settled, at which time a new one-month, near-the-money call is written. Data on daily BXM prices is available from October 16, 1997 to the present from options price quote vendors and at www.cboe.com/bxd (see the link Excel spreadsheet above).

Consultant's Study on the Cboe DJIA BuyWrite Index (BXD)

In 2007 the Fund Evaluation Group (FEG) issued a new study entitled "Evaluation of BuyWrite and Volatility Indexes—Using the Cboe DJIA BuyWrite Index (BXD) and the Cboe DJIA Volatility Index (VXD) for Asset Allocation and Diversification Purposes." The paper studied the 109-month period from October 1997 to November 2006. The FEG study presented several findings on the 9-year performance of the BXD Index, including:

• Diversification and Reduced Volatility. The volatility of the BXD was 25% less than that of the DJIA and 46% lower than the Russell 2000. The study found that if an investor had allocated 25% of an otherwise all-stock portfolio to the BXD, the portfolio volatility would have declined by about 9%.
• Income Generation. Selling index options 12 times per year can produce significant income. Over the 109-month period studied, the average monthly options premium received was 1.84%, or an annualized rate of 24.46%.
• Improved Risk-Adjusted Returns. Incorporating a 10% allocation to the BXD could have improved the risk-adjusted returns (as measured by the Sharpe Ratio) of all four comparative portfolios studied (i.e., all-stocks, all fixed income, aggressive and conservative portfolios).

Resources

• Cboe BuyWrite Indices Methodology
• Click here to see the complete roll data.

BuyWrite Strategy

Goals

The goals of index buywrite strategies may include: (1) receive upfront premium income in exchange for an upside cap, and (2) reduce risk from related stock indices.

Strategy

To implement an index buy-write strategy: (1) buy a portfolio of stocks or an index ETF, and (2) “write” (or sell) covered calls on a related index option.

Comments

In a comparison of out-of-the-money (OTM) buywrites vs. at-the-money (ATM) buywrites with the same expirations, OTM buywrites often have more potential upside in bull markets, but collect less premium than ATM buywrites, which may have less severe losses in bear market years. Depending on different investment objectives, investors may choose to write calls on all or part of the portfolio, at a constant or dynamic strike, and/or at a dynamic roll schedule. Graphs can vary depending on the strategy used (e.g., an ATM or OTM buywrite strategy).