The Chicago Board Options Exchange (CBOE) today announced that it will begin publishing a new benchmark index, the CBOE S&P 500 VARB-X Strategy Benchmark (VTY) on Friday, March 16, 2007. The new index tracks the performance of a hypothetical volatility arbitrage trading strategy designed to capitalize on the historical difference between S&P 500 Index (SPX) option implied volatility and the realized, or historical, volatility of the S&P 500 Index.
"CBOE's track record in new product innovation is unrivaled. The recent introduction of futures and options on the CBOE Volatility Index, VIX, followed by CBOE S&P 500 Three-Month Variance futures, broke new ground in risk management and created a whole new asset class," said CBOE Chairman and CEO William J. Brodsky. "The CBOE VARB-X benchmark provides another dimension to volatility trading and we are very proud to add this latest benchmark to our growing family of volatility products."
The CBOE S&P 500 VARB-X ("Volatility ARBitrage") Strategy Benchmark tracks the performance of a simulated trading strategy that systematically sells Three-Month Volatility Futures* and holds the short position through expiration. The value of the benchmark is calculated from the profit or loss on the short futures position, plus the interest income derived from the available capital used to finance the portfolio.
*NOTE: For the purpose of calculating historical VARB-X values, Three-Month Volatility Futures prices are derived from the square-root of CBOE S&P 500 Three-Month Variance Futures (VT) prices.
The CBOE S&P 500 VARB-X Strategy Benchmark assumes an initial cash investment of $1 million, and employs a set of objective risk-limiting guidelines intended to cap the maximum loss of the portfolio to half of the capital invested. These overriding risk guidelines are designed to endure market volatility that has only occurred twice since 1928: during a two-month period following the 1929 stock market crash, and again in October 1932.
The VARB-X benchmark was set to 100.00 as of June 21, 2004, and at the end of February 2007 was at a level of 159.68. Since its inception, VARB-X has reflected an annual rate of return of 19.0% with a standard deviation of 6.4%. By comparison, over the same period, the annual rate of return for the S&P 500 was 8.3% with standard deviation of 10.3%. The Sharpe Ratio, a standardized measure of return per unit of risk, for the VARB-X benchmark was 2.37-- five times greater than the Sharpe Ratio for the S&P 500 for the same time period, reflecting a more favorable risk-reward ratio.
CBOE will calculate and disseminate the VARB-X benchmark value once per day, at the close of trading, under the ticker symbol VTY.VTY values will be available on the CBOE website at www.cboe.com/Quotes and from options price quote vendors. A more detailed description of the strategy, the concept behind the Index, methodology and historical data is available at http://www.cboe.com/VARBX.
CBOE, the largest options marketplace in the U.S. and the creator of listed options, is regulated by the Securities and Exchange Commission (SEC). For additional information about the CBOE and its products, visit the CBOE website at: http://www.cboe.com/.
