Selling Options: Strategies and Results

Recent research by the Asset Consulting Group indicates that the strategy of selling options for income may have some legs.

ACS, a St. Louis, MO based consultancy, compared the results since mid 1986 of four options-based benchmark indexes against the performance of the S&P 500, which for their purposes served as a token of more traditional indexes in general.

The four CBOE S&P options-based indexes surveyed all measured the performance of portfolios that sell one-month, cash-settled S&P index options: the BuyWrite Index (BXM), the OTM BuyWrite Index (BXY), the PutWrite Index (PUT) and the 95-110 Collar index (CLL).

Investors and traders in options should be aware that the U.S. tax rules that apply can be complicated. As the ACG says, “Index options may qualify for Section 1256 treatment resulting in 60% long term/40% short term tax treatment regardless of the holding period,” but you’ll want to consult your own tax adviser.


The buy-write strategy is also known as the “covered call.” The two names reflect different perspectives. The buyer of an underlying asset (here, S&P stocks or their index) also writes, which is to say sells, the call option on that asset. It is a “covered call” because the underlying asset or assets also serve as cover, that is, they can be delivered to the buyer should the call option be exercised.

The portfolio on which the BXM is based sells options “at the money,” that is, where the strike price is close to the current market value.

The portfolio on which the BXY is based, on the other hand, sells options out of the money, meaning that the strike price is above the current market value. Thus, the buyers of the options written by the holder of the BXY portfolios are less likely to exercise the same than are their counterparts of the BXM portfolio.

PUT, on the third hand, is based on the sale of at-the-money cash secured put options, hedged with Treasury bills. The liability on the puts sold must be limited so that the amount held in T-bills can finance any loss should there be a rush to exercise. In December 2007, PUT won the most innovative benchmark award at the Superbowl of Indexing Conference.

Finally, CLL, the 95-110 Collar Index, as the name indicates, involves the sale of one month call options at 11 percent of the S&P 500 value, along with the sale of three month put options at 95 percent of the same index’ value.

The common idea of the first three of these strategies is to add value in either a horizontal or a declining market, at the cost of limiting participation should there be a bull run. The collar strategy (the yellow line) limits participation in either direction.

A dollar invested in PUT in 1986 would have been worth $12.53 in January 2011. That represents annualized growth of 10.4 percent. ACG concluded that such option writing strategy-based indexes “could appeal to investors who are concerned about low interest rates, increased volatility, illiquid investments, or sluggish stock market returns.”


Meanwhile there have been important changes of late in the ways in which you might go about trading S&P 500 Index options.

In 2010 an all-electronics exchange launched, known as the C2 Options Exchange C2 features a Complex Order Book and an Automated Improvement Mechanism.

In October 2011, CBOE Holdings initiated a new S&P 500 Index product, SPXpm. This is an index with PM settlement. In other words, the options “trade throughout the day on Friday of expiration week,” then settle at the final index level that afternoon, eliminating “the risk of overnight market fluctuations at expiration.”

In March 2012, the C2 Options Exchange allowed for other plays, by launching Super LEAPS option contracts for SPXpm options. LEAPS, long-term equity anticipation securities, were created in 1990. In their classic form they limit expirations to up to three years. But the Super LEAPS modification pushes the possibilities, up to five years.

In a new white paper, “SPXpm Options: Strategies for Managing Risk and Increasing Efficiency,” CBOE explains these recent developments and anticipates that SPXpm Super LEAPS will prove valuable for “insurance companies, pension funds and other institutions that currently hedge longer-dated equity market exposure in the over-the-counter market.”

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  1. Scott
    June 14, 2012 at 11:15 pm

    Has any research been conducted on the (potential) diversification benefits of investing in more than one of the referenced index option strategies?

  2. Christopher
    June 15, 2012 at 8:26 pm


    That’s a very good question. The only accurate immediate answer, for myself, is: “I don’t know.” But you’ve given me a neat research project. I’ll see what I can find. Our readers are of course invited to beat me to the punch if they like.

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