CBOE DJIA BuyWrite Index


The CBOE S&P DJIA BuyWrite Index is a benchmark index designed to show the hypothetical performance of a portfolio that engages in a buy-write strategy on the Dow Jones Industrial Average.

Descriptions

The term buy-write is used because the investor buys stocks and writes call options against the stock position. The writing of the call option provides extra income for an investor who is willing to forgo some upside potential.
The BXD Index is designed to show the hypothetical performance of a strategy in which an investor buys a portfolio of the 30 stocks in the DJIA, and also sells covered call options on the DJIA Index.

History

Investors have used exchange-listed options to engage in buy-write strategies since the 1970s, but prior to 2002 there was no major benchmark for buy-write strategies. In 2000 and 2001, options portfolio managers requested that the Chicago Board Options Exchange develop benchmark indexes for buy-write strategies. The CBOE S&P 500 BuyWrite Index was introduced in 2002, and the CBOE DJIA BuyWrite Index was introduced in 2005.
Investors have used covered call strategies for more than three decades. As noted in a magazine article “Buy Writing Makes Comeback as Way to Hedge Risk.” Pensions & Investments,, two developments have enhanced the interest in covered call strategies in recent years: in 2002 the Chicago Board Options Exchange introduced the first major benchmark index for covered call strategies, the, and in 2004 the consulting firm published . More than forty new buy-write investment products have been introduced since mid-2004.

Samples of Buy-write Investment Products Based on the DJIA

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Published Studies by Consulting Firms on the Buywrite Strategy

In 2007 issued a study entitled The paper studied the 109-month period from October 1997 to November 2006. The FEG study presented several findings on the 9-year performance of the BXD Index, including:
  • Income Generation. Selling index options 12 times per year can produce significant income. Over the 109-month period studied, the average monthly options premium received was 1.84%, or an annualized rate of 24.46%.
  • Diversification and Reduced Volatility. The volatility of the BXD was 25% less than that of the DJIA and 46% lower than the Russell 2000. The study found that if an investor had allocated 25% of an otherwise all-stock portfolio to the BXD, the portfolio volatility would have declined by about 9%.
  • Improved Risk-Adjusted Returns. Incorporating a 10% allocation to the BXD could have improved the risk-adjusted returns of all four comparative portfolios studied.
In 2006 published
In 2004 published a

News Clips

  • Crawford, Gregory. “Buy Writing Makes Comeback as Way to Hedge Risk.” Pensions & Investments,.
  • Demby, E. R. “Maintaining Speed -- In a Sideways or Falling Market, Writing Covered Call Options Is One Way To Give Your Clients Some Traction.” Bloomberg Wealth Manager,.
  • Feldman, Barry and Dhuv Roy. "." The Journal of Investing,.
  • Ferry, John. "An Array of Options - A Buy-write Strategy Can Add Some Octane to Portfolios When the Markets Lack Direction." Worth Magazine,, pp. 102 – 104.
  • Hadi, Mohammed. "Buy-Write Strategy Could Help in Sideways Market." Wall Street Journal. pg. B5.
  • Hill, Joanne, Venkatesh Balasubramanian, Krag Gregory, and Ingrid Tierens. "Finding Alpha via Covered Index Writing." Financial Analysts Journal.. pp. 29–46.
  • Moran, Matt.
  • Roeder, David. "New Funds Try Options to Boost Stock Income." Chicago Sun-Times,.
  • Schneeweis, Thomas, and Richard Spurgin. "The Benefits of Index Option-Based Strategies for Institutional Portfolios" ',, pp. 44 – 52.
  • Smith, Steven. RealMoney,.
  • Tan, Kopin, "Yield Boost -- Firms Market Covered-call Writing to Up Returns." Barron's,.
  • Wasik, J. “Used Wisely, Options Can Help Dodge Stock Losses.” Bloomberg News,.
  • Whaley, Robert. "Risk and Return of the CBOE BuyWrite Monthly Index" ',, pp. 35 – 42.
  • Woolley, S. “Squeeze Your Portfolio Harder,” BusinessWeek,.

External Links -- Education and Benchmark Indexes

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