CBOE Launches Smile Index Based on Implied Volatilities of S&P 500 Options
OREANDA-NEWS. October 26, 2016. Chicago Board Options Exchange® (CBOE®) announced today that it has launched the CBOE S&P 500® Smile Index (Ticker: SMILE), a premium-capture strategy benchmark index based on the steepness of the curve of implied volatilities of S&P 500 Index (SPX) options -- often referred to as the "smile."
The CBOE Smile Index's strategy alternates between selling a strangle (sell put/sell call) when the options smile is steep, and selling a risk reversal (sell put/buy call) when the options smile is relatively flat. Historically, a flatter smile has been associated with market bottoms and suggests a higher probability of a market upturn.
Constructed to perform in both bull and bear markets, the CBOE Smile Index takes its directional cue from the steepness of the smile as gauged by the ratio of put-to-call prices for SPX options, as an alternative to implied volatility.
If the put-to-call ratio is smaller than or equal to 1.5, it suggests a flatter smile and one 25 delta put is sold and one 25 delta call is bought. If the ratio is greater than 1.5, it suggests steepening and a 25 delta call is sold instead. The index is designed to then overlay the 25 delta put and 25 delta call options position with 1-month Treasury bills to collateralize the position. "Delta" is a risk measure commonly used by option traders that compares the potential change in price of the underlying asset with the corresponding change in the price of a derivative.
"Hedge funds, portfolio managers and individuals who trade derivatives products are looking for ways to enhance yields in the current low-interest-rate environment," said Bill Speth, Vice President of Research at CBOE. "The CBOE Smile Index offers these investors another tool to take action based on the current market outlook."
The CBOE Smile Index rolls on every third Friday of each month. So the same position is maintained for a month. Values for the index are expected to be published every 15 seconds and can be accessed on the CBOE website at www.cboe.com/smile.
Since 2002, CBOE has been a worldwide leader in creating benchmark indexes designed to help investors track the performance of investment strategies that use options or volatility products to help manage risk and enhance yield. CBOE currently publishes data on more than 30 strategy performance benchmark indexes, including the CBOE S&P 500 BuyWrite Index (BXM), the CBOE Russell 2000 PutWrite Index (PUTR) and the CBOE VIX Tail Hedge Index (VXTH). Information on all of CBOE's strategy performance benchmark indexes can be found at www.cboe.com/benchmarks.
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