35-Year Performance Analysis of Cboe S&P 500 Option-Selling Indices

Abstract

This article considers a number of Chicago Board Options Exchange (Cboe) Standard and Poor’s (S&P) 500 option-writing benchmark indices to provide insight into the potential performance of some typical option-writing strategies. In particular, the article discusses covered calls, put writing, covered combos, and butterfly spreads and condors. All six of the Cboe option-writing indices generated positive alpha over the period of study spanning more than a third of a century. Option writing is generally expected to generate abnormal returns by collecting significant premium income. On average, if options are sold at implied volatilities above the subsequently realized volatility, the strategies should generate positive alpha. However, this alpha may not represent true risk-adjusted performance but rather risk premium compensation for taking on short volatility risk. The strategies underlying these indices may be of interest to equity market investors that are willing to sacrifice some potential upside while assuming short volatility risk, in exchange for risk reduction, income enhancement, or both.