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S&P/ASX Buy-Write Index

The S&P/ASX 200 VIX (A-VIX) is Australia’s market sentiment indicator.

Background

The S&P/ASX 200 Buy-Write Index (XBW) recognises that the index options available to Australian investors have been written over different underlying indices during the period under consideration:

  • From December 31, 1991 to April 3 2000, index options over the SPI® futures contract were used. The underlying index for the SPI® futures was the All Ordinaries index, as calculated by the ASX
  • From April 3 2000 to March 31, 2001 index options used were ASX XPI options. The S&P/ASX 200 Index was introduced on 3rd April 2000 as a replacement benchmark for the Australian market. However a continuation of the former All Ordinaries Index (XPI) was calculated and disseminated by the ASX to allow for the maturity of futures contracts based on the superseded All Ordinaries Index. During this period ASX listed index options on the XPI
  • From March 31 2001, ASX index options (XJO) have been used.

The S&P/ASX Buy-Write Index combines the underlying accumulation index (S&P/ASX 200) with an ASX call option selected from the series closest to the money with the nearest expiry. In Australia, index option series expire each quarter, so at the time of selection, each option used in the index will have 3 months to expiry. Once an option series has been selected, it is held to maturity. A new series is selected at the expiry of the current one based on the criteria:

  •  On the nearest out of the money strike
  •  Nearest available expiry.

ASX index options are European style options with cash settlement at expiry. An adjustment to the S&P/ASX Buy Write Index is made each expiry to reflect the funds (if any) that need to be paid to settle the option contract. At the same time, a new option series is written with the proceeds from the option premium being reinvested in the index plus option portfolio in accordance with the formula provided by Whaley*.

This differs from the Chicago Board Options Exchange (CBOE) methodology where index options expire monthly and options with one month to expiry are selected. Otherwise the methodology used in the calculation of the back history mirrors the methodology set out by Whaley* and used by CBOE.

A full copy of the original methodology is available at www.cboe.com/bxm

The Index

The S&P/ASX Buy-Write Index (XBW) replicates the performance of a well known option trading strategy where the investor holds a long position in a security and then writes (or sells) call options against the long position. The short call position earns option premium for the investor however the short call also limits the potential profit from the long security position.

In the case of the XBW, the underlying security is the S&P/ASX 200 Accumulation Index over which a S&P/ASX 200 Index call option is sold each quarter. Once an option series has been selected and a short option position established, the option position is held to expiry. At the expiry of the current option a new option to be sold is selected where the new option is the next quarterly option to expire and the next out of the money strike.

More information on the XBW:  Buy-Write Strategy factsheet.

Options are a financial instrument that can be considered whenever equity fund managers seek to:

  • Generate extra returns: by writing options and collecting premium income when your market view is that you are happy to cap upside.
  • Reduce risk: by buying put options as insurance, or by writing premium income which cushions downside price moves.
  • Reduce transactions costs: by gaining exposure to stocks or an index using options, rather than paying full stock transactions costs.
  • Reduce market impact costs of acquiring stock: by accumulating exposure via options, and then selling those options when the required stock weight has been reached.
  • Capital gains implications: because you can effectively sell stock by selling call options, capital gains implications can be managed.