Aug 25, 2015

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.

SymbolStart DateAnnualized AlphaBeta SPXAlpha t-stat
BXM30-Jun-863.8%0.663.88
BXMC31-Jan-904.5%0.694.75
BXMD30-Jun-864.1%0.834.60
BXMW29-Jun-122.3%0.611.57
BXY1-Jun-884.3%0.764.40

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.

SymbolStart DateAnnualized AlphaBeta SPXAlpha t-stat
BXM30-Jun-860.3%0.250.66
BXMC31-Jan-900.7%0.291.31
BXMD30-Jun-861.8%0.572.57
BXMW29-Jun-122.0%0.292.10
BXY1-Jun-880.8%0.411.16

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).

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