The CBOE Collar Index, a Benchmark with Downside Protection

I’ve been spending time and words – both here at Options for Rookies – and as a commenter at other blogs – trying to convince anyone who will read my contributions that it's inefficient to manage the risk of owning a stock market portfolio without using options.  Most of the time my comments do not draw any responses, despite my belief that they are on topic, but on occasion, a discussion ensues.

I've been encouraging investors who lack any knowledge of options to consider adopting a collar strategy which provides insurance against large losses at the cost of sacrificing the opportunity to earn large profits.

Mike at The Oblivious Investor made this reasonable request:
"Limiting your upside is just as real of a cost as paying cash… if you have any data whatsoever to indicate that options reduce your downside at a lower cost than simply reducing your stock allocation, please feel free to direct me to it." 

In other words, "Where's the beef?"

I began a casual search for historical data and discovered that the CBOE has several interesting indexes that are new to me.  I've blogged about VIX (The CBOE Volatility Index) and BXM (the CBOE Buy-Write Index), but was delighted to find that CLL (the CBOE Collar Index) has been published since September 2008, with data going back to Jun 1, 1986.  One reason for going back that far was to allow investors to see the benefits of such a strategy during the October 1987 meltdown.


Collars are flexible and the investor can chose among many calls to sell and puts to buy.  The CBOE chose the CBOE S&P 500 95-110 Collar Index.

This is the CBOE description of their product: 

"In September 2008 CBOE launched the CBOE S&P 500 95-110 Collar Index (CLLSM), an index designed to provide investors with insights as to how one might protect an investment in S&P 500 stocks against steep market declines. This strategy accepts a ceiling or cap on S&P 500
gains in return for a floor on S&P 500 losses. 
The passive collar strategy reflected by the index entails:

– Holding the stocks in the S&P 500 index;
– Buying three-month S&P 500 (SPX) put options to protect this S&P 500 portfolio from market decreases; 

– Selling one-month S&P 500 (SPX) call options to help finance the cost of the put options.

The term "95-110" is used to describe the CLL Index because (1) the three-month put options are purchased at a strike price that is about 95 percent of the value of the S&P 500 Index at the time of the purchase (in other words, the puts are about five percent out-of-the-money), and (2) the one-month call options are written at a strike price that is about 110 percent of the value of the S&P 500 Index at the time of the sale (in other words, the calls are about ten percent out-of-the-money).

The CLL Index is CBOE's first benchmark index to incorporate the downside floor protection of protective puts on the S&P 500 Index, financed by the sale of SPX call options, and will be a valuable resource for investors who want to explore ways to manage their portfolio risk in bear markets."

There's a lot of data, and I'll look at more of that data at another time.  More information on this benchmark index is available, but for today, I'll skip to the bottom line.

How did an investor do when owning three different portfolios?

a) A basket matching the performance of the S&P 500 Index, including dividends.  This is SPTR, the S&P Total Return Index

b) BXM, the Buy-Write Index.  The same basket of stocks as above, but covered calls are written in the morning on the 3rd Friday of each month.  The option chosen is always the lowest strike price that is out of the money.  Thus, these are essentially at the money options.  No adjustments are allowed and the position is held through expiration.

c) CLL 95-110.  The trading methodology is described, but the major points are: Own the same basket as above, buy puts that are 5% OTM three months before expiration, and sell front-month calls that are 10% OTM.  Sell new calls each month.  There are certain conditions under which option positions are rolled (moved to a new strike and expiration month), but we need not get into that much detail at this time.

The following graph shows the results from June 1, 1988 through Feb 27, 2009. 


It's apparent that the Collar Index under performs most of the time, but when the markets are heading south, CLL outperforms by enough to periodically catch up with the other two indexes.  In addition, collars provide a smoother ride (less volatile) because the value of the index doesn't rise and fall as dramatically as the other indexes.

Investors who seek the protection of owning collars are not hoping to outperform the market over an extended period of time.  Instead, they seek protection from major losses at a modest cost.  To me, CLL has performed as well as an investor can hope.

For the record, On Jan 1, 1988, SPTR, BXM, and CLL are set to 100.  The values on 2/27/2009 were 438.76, 547.99, and 408.49 respectively.

Investors don't have to choose a 95-110 strategy and your results will not match this index. 

I believe this data supports the idea that owning collars is a valid method for reducing risk when investing in the stock market.

Mike – Is this the evidence you were looking for?


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