February, 2009 (February 13 and 27) and November 28, 2008 Trader's Corner articles discussed hedging strategies such as the collar. Studies by Steven Lentz, Edward Szado and Hossein Kazemi, among others, were quoted. Although Lentz tested many permutations of the collar, the conclusion had been that the overall performance was enhanced with the purchase of a longer-term protective put such as a six-month put and the sell of a shorter-term, at- or near-the-money call against the equity holding.

Lentz's studies had included several which had tested the performance of various covered-call strategies, too, including selling an at-the-money and an out-of-the-money call each month against the stock holding. At the time those articles were written, I had forgotten an even earlier article I had written, back when the CBOE first introduced its BXM index, the CBOE S&P 500 BuyWrite Index.

The CBOE calls this index a "passive total-return" index. The goal of the index is to recreate the effect of buying the SPX and selling a one-month-out call option with a strike just above the current SPX value. The credit collected on the sale of the call is added to the index's value. On the third Friday of each month, after that front-month option has expired, a new one-month, just-above-the-money call is sold against the position. If the expired option was in the money, it would be settled in cash, with the appropriate amount deducted from the index's value. If the call expired out of the money, no further action is taken.

Connecting the Lentz research and the previous articles on these indices, it occurred to me that if you don't want to back-test the performance of this or several similar strategies on your own, you can let the CBOE do the work for you, at least on several indices. Current product offerings include the CBOE S&P 500 BuyWrite Index (BXM), the CBOE S&P 500 2 percent OTM BuyWrite Index (BXY), the CBOE DJIA BuyWrite Index (BXD), the CBOE NASDAQ-100 BuyWrite Index (BXN) and the CBOE Russell 2000 BuyWrite Index (BXR).

The CBOE also offers a CBOE S&P 500 PutWrite Index (PUT), in which SPX put options are sold against "collateralized cash reserves" that are kept in a money market account. The money from the sequenced sell of puts is invested in one- and three-month Treasury Bills. Another index that tracks a specific options strategy is the CBOE S&P 500 95-110 Collar Index (CLL). This index is meant to provide risk-management benchmark that would recreate a collaring strategy in which calls were sold against a basket of stocks that recreate the SPX and an insurance put is then bought. The call would be sold at about 110 percent of the SPX's current value and a put bought at about 95 percent of the SPX's value.

BXM Performance During the Downturn and Bounce off March's Low:
As it did with the BXM, the CBOE designed these various indices to track specific strategies over long periods of time. For example, with a new methodology, the BXM now tracks the performance of its buy-write strategy since June 30, 1986 to the present time. Calls were assumed to be sold at the bid for the calculation of the index.

In a January 12, 2009 "Ask the Institute" reply to a question about how often the index is calculated and the new level made available, the CBOE's expert noted that the CBOE recalculates the index each 15 seconds during the day. An exception to that practice occurs on the third Friday, the "roll dates" for this index. Those every-fifteen-second updates don't usually begin until the afternoon on those dates.

The introduction of these indices did prompt several studies comparing the performance of various strategies to that of the SPX or other underlyings during the same period. For example, a 2006 Callan Associates study found that for the 18 years previous to the publication of the study, the BXM's compound annual return approximated that of the SPX, but with only two-thirds the risk of holding the SPX. Just as Lentz had found in his shorter back tests, Callan Associates found that the BXM underperformed the SPX during sharp rallies but out performed during "all periods of declining equity markets." Links to the studies can be found at the CBOE's site, following the "Products" tab to the "Index Sites" and then to "CBOE BuyWrite Indexes." I would provide the direct link, but links to specific CBOE pages often don't work. Other studies included a December, 2008 Ennis Knupp and Associates study that compared the CBOE S&P 500 PutWrite Index's performance to several benchmarks, including the SPX. According to their study, the CBOE SPX PutWrite Index's average annual return over the course of the study outperformed the SPX, MSCI EAFE Index, Barclays Capital Aggregate Bond Index and 3-month Treasury Bills.

You can't "buy" the BuyWrite Index. You could, if so inclined, attempt to recreate it, and questions addressed to the CBOE sometimes ask if a trader can "gain exposure to BXM through tradable, investable instruments." However, that 2008 Ennis Knupp and Associates study concluded by warning of the risks of trying to recreate the index. Traders who like the performance they see on any of these indices are urged to discuss tactics for recreating their performances in their portfolios, and are warned of some of the risks. In the years since the BXM was introduced, ETFs and ETNs have been created to track the performance of some of the CBOE's BuyWrite indices. Options are even available on at least one of those, the PBP or PowerShares S and P 500 Buy Write ETF.

Such funds might seem the ideal way for investors to let the fund managers do the work for them, but potential investors in such funds should be aware that not all ETFs and ETNs flooding the markets in recent years have been successful. Studying the performance of a BuyWrite index and then blindly investing in a fund that's meant to track it might not produce the expected results. Do your due diligence on such funds just as you would with any other. Ask questions. Read articles. Find out if there are tax consequences to these strategies that would make them troublesome for your needs.

In the meantime, however, if you're interested in studying whether the strategy itself provides benefits that interest you, perhaps to hedge against losses in a stock holding in your portfolio, these indices are a good place to begin.