Investors have no shortage of data for analyzing U.S. equity put-option writing strategies. Since 2007 the Chicago Board Options Exchange (CBOE) has been publishing daily pricing data for its S&P 500 PutWrite Index (PUT), which measures the performance of a hypothetical strategy that sells cash-collateralized S&P 500 put options. Its modelled historical pricing data stretches back as far as June 1986. Importantly, CBOE has also provided historical data for its Russell 2000 PutWrite Index (PUTR) back to 2001 for some time.
But what if the same investors analyzing U.S. equity put-option writing strategies want to consider the benefits of a global or non-U.S. put-writing strategy? Can they just assume that the relationship between the S&P 500 and the PUT index would be replicated elsewhere? Or are the results from the U.S. equity markets skewing their view of what a non-U.S. put-writing strategy looks like?
Until July this year, that question was very difficult to answer objectively. Now, however, CBOE has officially launched new PutWrite option strategy indices on the MSCI Emerging Markets (PXEF) and the MSCI EAFE Indices (PXEA), with historical data back to April 2006. We believe this marks a new phase in the development of index option strategies and furthers the potential for broader adoption of put-write strategies by institutions, consultants and intermediaries.
Divergence
As well as providing performance data for these two additional regions, these indices make it possible to build a proxy global index by combining PXEF and PXEA with the existing PUT data. For our hypothetical global portfolio, we allocate 50% to PUT, 35% to PXEA and 15% to PXEF.
How does the performance of these new indices relate to the performance of their equity counterpart indices?
The chart and table below show how the divergence between the S&P 500 and the PUT index results is markedly different than the comparable differences between the MSCI EAFE and MSCI EM index pairs. In emerging markets and non-U.S. developed markets, a put-writing strategy appears to have improved risk-adjusted return relative to the counterpart equity indices, whereas in the U.S. the opposite is the case.
PutWrite and Equity Index Return vs. Risk, March 2006 – July 2019
| Model Global PutWrite Benchmark | MSCI ACWI Index | CBOE S&P 500 PutWrite (PUT) | S&P 500 Index (SPX) | CBOE MSCI EAFE PutWrite (PXEA) | iShares MSCI EAFE ETF (EFA) | CBOE MSCI EM PutWrite (PXEF) | iShares MSCI EM ETF (EEM) | |
| Annual Return (%) | 5.0 | 5.7 | 6.3% | 8.7% | 2.5% | 3.0% | 6.0% | 3.7% |
| Volatility (%) | 10.9% | 15.7% | 10.7% | 14.4% | 11.4% | 17.4% | 13.9% | 22.3% |
| Risk-Adj. Ret. | 0.46 | 0.36 | 0.59 | 0.60 | 0.22 | 0.17 | 0.43 | 0.17 |
| Beta to Underlier | 0.61 | 1.00 | 0.64 | 1.00 | 0.57 | 1.00 | 0.52 | 1.00 |
| Max Drawdown (%) | -34.6 | -54.9 | -32.7 | -50.9 | -38.4 | -57.4 | -37.0 | -60.4 |
| Up-Mkt. Cap. (%) | 59 | 100 | 62 | 100 | 54 | 100 | 52 | 100 |
| Down-Mkt. Cap (%) | 50 | 100 | 56 | 100 | 50 | 100 | 37 | 100 |
Source: Bloomberg. Model Global PutWrite Index consists of 50% S&P 500 PutWrite, 35% MSCI EAFE PutWrite and 15% MSCI EM PutWrite, rebalanced monthly. Indexes are unmanaged and are not available for direct investment. Returns are shown net of fees.
Momentum
The introduction of the new option strategy indexes enables institutional investors, consultants and intermediaries to observe the risk-reward tradeoffs of put-writing across global equity exposures. The indexes also provide independent, rules-based global option strategy inputs for comparison with traditional low-volatility and hedged-equity strategies in asset allocation studies. Most importantly, we now have objective benchmarks against which to measure the performance of active put-option writing strategies, such as those offered by Neuberger Berman. The fact that the “passive” strategies differ so much from one region to the next underlines the importance of those benchmarks.
We believe the objective and formal validation of the put-writing strategy at the global level will help build momentum for long-term investors to consider these “alternative”, cost-effective approaches to equity exposure.
