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The Cboe S&P 500 SMILE Index (SMILE) is a benchmark which measures the performance of a hypothetical option strategy. The strategy overlays a combination of S&P 500 25 delta put and call options (SPX options) on an investment in one-month Treasury Bills. The T-Bills collateralize the options. The objective is to capture the volatility premium embedded in SPX options but to mitigate the risk of a short call exposure should the S&P 500 increase. The strategy relies on the ratio of put and call prices to gauge that risk. The put position is always short, but the call position switches from short to long when the put/call price ratio falls below a specified threshold. Investors often encapsulate the curve of implied volatilities at a given maturity by the ratio of implied volatilities of 25 delta put and call options. The implied volatilities of SPX options form a slope that is similar to a smile, which skews during volatile periods. The shape of the smile is viewed as an indicator of future market conditions.The SMILE portfolio is rebalanced monthly, typically on the third Friday of the month, when SPX options expire.
