Performance Analysis of Options-Based Funds: Summary of Results

Posted: January 21, 2015 | by: Thomas F. McKeon, CFA

The Institute for Global Asset and Risk Management has released a new study of Equity Funds, CEFs and ETFs that use options. The conclusion is powerful.

Executive Summary of the Study


The first SEC-registered funds focused on the trading of options were launched in the U.S. in 1977, and by 2003 there were twelve such funds. Over the last ten years the category has grown substantially, to the point where there are now at least 119 SEC-registered funds (including mutual funds (MFds), closed-end funds (CEFs), and exchange-traded funds (ETFs), with an aggregate of more than $46 billion in assets under management (AUM), that are focused on the use of exchange-listed options for portfolio management purposes. The fund performance analysis in this paper examines a subset of 80 (of the 119) funds that focus on the use of options in portfolios with broadly diversified U.S. equity holdings. 


There are several strategies that an options-based fund may follow, including selling covered calls, selling cash-secured puts, buying protective put options, or investing in collars. The Chicago Board Options Exchange® (CBOE®), which sponsored this study, lists several benchmark indices (including the BXM, BXY and PUT indexes) that follow these strategies. 



Summary of Results


GROWTH IN NUMBER OF FUNDS. An annual chart in the study shows that the number of Options-Based Funds grew from 10 in 2000 to 119 in 2014. 


15-YEAR ANALYSIS OF FUNDS. The study performed an analysis of the equal-weighted performance of 80 Options-Based Funds that focus on use of U.S. stock index options and/or equity options during the 15-year period from 2000 through 2014, and found that : 


HIGHER RISK-ADJUSTED RETURNS. The Options-Based Funds had similar returns as the S&P 500® Index with lower volatility and lower maximum drawdowns. The Options-Based Funds had higher risk-adjusted returns, as measured by the Sharpe Ratio, Sortino Ratio, and Stutzer Index. 


ANALYSIS OF OPTIONS-BASED BENCHMARKS OVER 26. YEARS. The study also performed an analysis of the performance over the period from mid-1988 through the end of 2014 for various options-based benchmark indexes that use S&P 500 (SPX) options and for some traditional benchmark indexes. 


STRONG PERFORMANCE FOR BENCHMARKS THAT USE SPX INDEX OPTIONS. During the 26 ½ year-time period, both the CBOE S&P 500 PutWrite Index (PUT) and the CBOE S&P 500 2% OTM BuyWrite Index (BXY) had higher returns and lower volatility than the S&P 500 Index. A key source of strong risk-adjusted returns has been the fact that the index options usually have been richly priced. 



In a world where outcomes are the new alpha—as posited by the consultant McKinsey—these outcomes are optimal and belong in the asset mix of every investor who requires equity returns to meet their objective.


You can download the study here:

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