More on CBOE's Buy-Write Indexes

As I mentioned in the previous post, it is not easy to separate real alpha, from mean-median difference in short gamma strategies. Since buy-write strategies are short gamma, it is not surprising that they show alpha in regression. This is the table that I calculated in the previous post.

Symbol	Start Date	Annualized Alpha	Beta SPX	Alpha t-stat
BXM	30-Jun-86	3.8%	0.66	3.88
BXMC	31-Jan-90	4.5%	0.69	4.75
BXMD	30-Jun-86	4.1%	0.83	4.60
BXMW	29-Jun-12	2.3%	0.61	1.57
BXY	1-Jun-88	4.3%	0.76	4.40

How will these results change if we add another (systematic short volatility) factor into regression. For that factor I will use CBOE's own PUT index, which sells monthly atm puts.

Symbol	Start Date	Annualized Alpha	Beta SPX	Alpha t-stat
BXM	30-Jun-86	0.3%	0.25	0.66
BXMC	31-Jan-90	0.7%	0.29	1.31
BXMD	30-Jun-86	1.8%	0.57	2.57
BXMW	29-Jun-12	2.0%	0.29	2.10
BXY	1-Jun-88	0.8%	0.41	1.16

As we can plainly see, adding PUT as factor significantly reduces alphas, and their t-stats. Not only BXM - which is by construction (pretty much) a linear combination of PUT and SPX has no alpha, but also other benchmark "innovations" -  BXMC (conditional) or BXY (2% otm) do not provide any meaningful alpha. The only two benchmarks standing out now is BXMW - which has relatively short history, and BXMD (30-delta buy-write).