Volatility

CBOE to launch Low Volatility Index

The Chicago Board Options Exchange has begun disseminating values for a new benchmark index, the CBOE Low Volatility Index (LOVOL).

The CBOE LOVOL Index is designed for investors whose preferences have shifted from investing in riskier assets to lower-volatility assets.

The index aims to provide investors with the ability to replicate an investment strategy that is subject to less downside volatility in a portfolio of S&P 500 stocks, while still preserving the bulk of market gains.

The CBOE LOVOL Index is a blend of two of CBOE's most popular strategy benchmark indexes - the CBOE S&P 500 BuyWrite Index (BXM) and the CBOE VIX Tail Hedge Index (VXTH). The LOVOL Index bridges the space between the BXM and VXTH strategies:

• The BXM strategy cushions returns against market downturns in exchange for lower returns in more bullish markets.

• The VXTH strategy provides substantial protection against severe downturns in exchange for lower returns in less volatile markets. 

The CBOE LOVOL Index measures the performance of a portfolio that overlays SPX and CBOE Volatility Index (VIX) calls over the S&P 500 Index. Specifically, the index is obtained by holding a portfolio of S&P 500 stocks and simultaneously selling SPX calls and buying one-month VIX 30-delta calls on a monthly basis.

For the five-year period ending 31 October 2012, the annualised return for the LOVOL Index was 2.9 per cent (versus 0.4 per cent for the S&P 500 total return index). The standard deviation for the LOVOL Index during the same period was 13.6 per cent (versus 19.1 per cent for the S&P 500).

CBOE will disseminate the CBOE LOVOL Index value every 15 seconds during the trading day.
 

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