White Papers & Research Articles
White Papers
The Changing Risk Management Landscape in Derivatives (PDF)
Sponsored by The Options Industry Council, the Lepus report “The Changing Risk Management Landscape in Derivatives” highlights and explores a number of current trends, challenges and issues in the derivatives area including:
Regulatory Changes, OTC vs. Exchange-Traded Derivatives, Risk Management, and Advantages of Different Approaches. 
ISEE vs. Dow Jones Industrial Average - 2008 in Review (PDF)
Past analyses of ISEE values vs. market indices (DJIA and S&P 500) seemed to suggest that clusters of consecutive ISEE highs or lows may appear to signal changes in market direction, and usually the direction of the turn was contrarian to investor sentiment. By analyzing the data for ISEE vs. DJIA for all of 2008, we see this same pattern. It appears that the ISEE Index may be a good tool and useful contrarian indicator for potentially identifying turns in the market when clusters of extreme readings appear to occur. Provided by ISE.
Options Based Portfolio Management Strategies - An Idea Whose Time Has Arrived (PDF)
West Chester Capital Advisors has released a paper written by the firm's Chief Investment Officer & Principal, Thomas F. McKeon, CFA.
The white paper discusses several options strategies which can be used as tools to manage portfolio risk and augment income
within asset allocation and portfolio construct. Mr. McKeon states: "Investors of all stripes should be willing to consider OBPMS. The return
and risk data is compelling. More return with less risk is the holy grail...... " (May 2009)
The CBOE Volatility Index - VIX (PDF / 1.71MB)
VIX provides a snapshot of expected stock market volatility over the next 30 calendar days and is calculated real-time from index option premiums. This paper discusses in detail, modifications done in September 2003 to the calculation methodology to incorporate more strike prices, make the calculated number independent of any pricing model and to change from using S&P 100 Index options to S&P 500 Index options. Provided by CBOE.
"VIX Futures and Options—A Case Study of Portfolio Diversification During the 2008 Financial Crisis" by Edward Szado, CFA, Center for International Securities and Derivatives Markets (CISDM) at the University of Massachusetts, Amherst, analyzes data from March 2006 to December 2008. A University of Massachusetts study found that certain investments in futures and options on the CBOE Volatility Index® (VIX®) could have reduced downside risk for a typical institutional investment portfolio during the 2008 financial crisis. Download the full paper (PDF) or a 2 page summary (PDF). Provided by CBOE.
Mutual Funds & Listed Options: Portfolio Management Strategies (PDF)
An overview of various ways to hedge large diversified portfolios using listed options. Examples provide descriptions for both positive and negative outcomes. This paper also provides a general idea of the legal and taxation issues as they relate to option use with mutual funds. Provided by CBOE.
Corporate Stock Repurchase Programs & Listed Options (PDF)
Given the recent popularity of corporate stock repurchase programs, this paper provides detailed information on how a corporation engaged in this activity may use either standardized or FLEX options to help reduce the cost or hedge these share buyback programs. Provided by CBOE.
Individual Retirement Accounts and Keogh Plans (PDF)
This paper covers both positive and negative effects of portfolio strategies that may be more suitable for use in retirement accounts. Legal and accounting issues are also addressed specific to a variety of retirement accounts. Provided by CBOE.
ERISA Pension Funds & Listed Options (PDF)
Information regarding ways for pension funds to incorporate the use of listed options into their portfolio management strategies. Ideas discussed include ways to gain market exposure with option positions and using options to hedge equity market risk. There is also an overview of legal issues related to a pension fund's use of listed options. Provided by CBOE.
Hedge Funds & Listed Options (PDF)
Covers ways hedge funds may use various option strategies to gain market exposure with limited, predefined risk and strategies to hedge potential downside exposure. A legal and regulatory review is provided as they relate specifically to hedge funds using options. Provided by CBOE.
High-net-worth Investors & Listed Options (PDF)
Provides portfolio management strategies for affluent investors, family offices and trust companies who wish to engage in options trading to gain market exposure or hedge their investments. Addresses information on options transactions involving insiders, affiliates and restricted securities in addition to an overview of taxation issues involving option trades. Provided by CBOE.
Collaring the Cube: Protection Options for a NASDAQ 100 ETF Portfolio (PDF)
A study by Szado and Kazemi of the University of Massachusetts evaluated nine years of data on the Powershares QQQ exchange traded fund and found that a protective collar strategy using a six month put purchase and consecutive one month call writes provided far superior returns compared with buying and holding the NASDAQ-100 Index® ETF with about one-third of the index volatility. Over the 108 month study period, this collar strategy returned more than 150% cumulatively, while the cube portfolio lost over 12%.
Research Articles
Time Might Be Right To Don a Collar from Investment News
For nervous investors who still want equity exposure, puts and calls are a good way to hedge risk. Whether it is to help lock in last year's gains or to put to better use some of the more than $3 trillion parked in money market funds, the creative use of options may be just the tool that finanical advisers need for dealing with skittish investors. (January 2010)
Loosening Your Collar: Alternative Implementations of QQQ Collars
A ten year study by the Center for International Securities and Derivatives Markets at the University of Massachusetts found that a long protective collar strategy using 6-month put purchases and consecutive 1-month call writes earned far superior returns compared to a simple buy-and-hold strategy while reducing risk by almost 65%. The research evaluated passive and active implementations of long protective collar strategies on the Powershares QQQ Exchange-Traded Fund (Ticker: QQQQ). The study also simulated a collar on a small cap mutual fund. The return of the active mutual fund collar was four times the return of the fund, while the standard deviation was about one-third lower. Over the 122-month study period, the passive collar returned almost 150% while QQQ lost one-third of its value. The active collar outperformed both strategies and returned more than 200%. (September 2009)
U.S. Equity Options Market: Changing Competitive Landscape
Aite Group has released an impact report titled, “U.S. Equity Options Market: Changing Competitive Landscape” written by Sang Lee, Managing Partner. The paper examines important industry issues and trends and highlights key players in the marketplace, including exchanges and broker/ dealers. This report also presents perspective from various client segments including hedge funds, traditional asset managers, and proprietary trading firms. (November 2008)
Equity Options Trading 2008: Rising Out of Obscurity
This is a study conducted by the TABB Group to examine the explosive demand of equity options trading in the institutional community. Recent changes in regulatory initiatives and the introduction of new technologies have created seemingly insatiable demand from every quadrant of the asset management community... (February 2008)
Finding Alpha via Covered Index Writing (PDF)
By Joanne M. Hill, Venkatesh Balasubramanian, Krag Gregory, and Ingrid Tierens of Goldman, Sachs & Co. Copyright 2006 by Goldman, Sachs & Co.
Risk and Return Characteristics of the Buy-Write Strategy on the Russell 2000 Index (PDF)
This study was conducted by the Isenberg School of Management’s Center for International Securities and Derivatives Markets (CISDM) at the University of Massachusetts and reviewed data from January 18, 1996 to November 16, 2006 concluding that a passive buy-write strategy of one month to expiration calls on the RUT consistently outperformed the index on a risk adjusted basis. You can also view the article summary (PDF).
Collar Trade (PDF)
A collar trade consists of selling one out-of the-money (OTM) call and buying one at-the-money (ATM) put for each 100 shares of stock owned. The expiration month is the first one available that is at least one year away. As a result, the position consists of a covered call (long stock and short OTM call) to collect income and a long put for protection. Provided by Options Trader Magazine.
