As the Croft Financial Group utilizes options strategies in all our investment portfolios, it only seems logical that we measure our performance against a benchmark created specifically for options investment strategies.
In recent years, the Montreal Exchange (Mx) received general interest from institutional and individual customers as to the performance attributes associated with various option strategies. The Mx was encouraged to create passive benchmark indices to reflect these performance attributes. As a result, the Mx worked with Richard Croft to construct two passive total return indexes – otherwise know as the Mx Covered Call Writers Index and the Mx Straddle Writers Index.
The added income from the covered calls in an option writing strategy has historically provided a cushion in times of flat to declining markets. When the underlying market is rising rapidly, option writing strategies generally underperformed a buy and hold approach for the S&P TSE 60 iShares.
The most attractive feature in an option writing strategy is the marked reduction in the volatility of the overall portfolio. The daily standard deviation for all observations in the Mx Covered Writers Index was 0.83%, for the Mx Straddle Writers Index it was 0.81% versus 1.15% for a buy and hold strategy using the S&P TSE 60 iShares.
The M-X Covered Call Writers Index
A covered call write (or buy write) is the most common option strategy used by individual investors. With this strategy the investor owns the underlying security – be it a stock, a bond or an index – and sells a call option against the position. By selling the call option, the investor is agreeing to deliver the underlying security to the call buyer at a pre-determined price.
The Mx Covered Call Writers Index is a benchmark designed to reflect the return on a portfolio that consists of a long position in the stocks in the S&P TSE 60 index (symbol XIU) and a short position in the XIU close to the money call options.
The M-X Straddle Writers Index
A straddle involves the simultaneous purchase or sale of a close to the money call and a close to the money put. In order for a short straddle to be covered, the investor must hold the underlying security to cover the short call and hold sufficient cash to meet the obligation of the short put.
A fully secured short straddle is a volatility trade. The straddle writer is not focused on where the underlying security is going, only that it remains within the boundaries of a trading range established by the straddle. In some cases, investors employ straddle writing as a way to dollar average their way into a stock position. Buy an initial position and set aside cash to buy additional shares should the short put option be assigned.
The Mx Straddle Writers Index involves the simultaneous sale of a close to the money call and a close to the money put against a long position in the S&P TSE 60 iShares and a cash position used to secure the short put option.
Daily data on the performance of the Mx Covered Call Writers Index and the Mx Straddle Writers Index is available from December 1993 to the present. The daily closing prices of both indexes is calculated and disseminated by the Croft Financial Group. Prices for the Mx Covered Call Writers Index and the Mx Straddle Writers Index are updated on the Montreal Exchange website and this website weekly.