PDF Cboe S&P 500® Dividend Aristocrats Target Income Index
Cboe S&P 500? Dividend Aristocrats Target Income Index
Indexes
About the Index
The Cboe S&P 500 Dividend Aristocrats Target Income Index ("SPAI" or "SPAI Index") is a benchmark designed to track the performance of a hypothetical partial buy-write strategy on constituents of the S&P 500 Dividend Aristocrats Index.1 The S&P 500 Dividend Aristocrats Index, constructed and maintained by S&P Dow Jones Indices LLC, targets companies that are currently members of the S&P 500, have increased dividend payments each year for at least 25 years, and meet certain market capitalization and liquidity requirements. The SPAI Index was launched on August 15, 2017.
Objective: Income and Growth
The SPAI Index is designed with the primary goal of generating an annualized level of income that is approximately 3.5% over the annual dividend yield of the S&P 500 Index, and a secondary goal of generating price returns that are proportional to the price appreciation of the S&P 500 Index.
Strategy
The SPAI Index investment strategy includes (1) buying the stocks contained in the S&P 500 Dividend Aristocrats Index, and (2) partially "writing" (or selling) weekly "covered" call options on each stock, generally on the last trading day of each week. The number of call options overwritten per unit of stock exposure is varied periodically, with the goal of generating a total yield from dividends and call option premiums that is 3.5% per annum higher than the yield from dividends of the S&P 500 Index. The percentage of each stock that is overwritten with call options will be adjusted to maintain the income target of 3.5% over the annual S&P 500 dividend yield.
Key Highlights
TARGET OUTCOME RETURNS A solutions-based approach that targets a specific outcome to address specific investment needs.
COMBINES INCOME WITH GROWTH Seek to add a level of targeted income to dividend growers by trading some of the uncertain future growth opportunity of the stocks for current income.
POTENTIAL FOR BETTER RISK-ADJUSTED RETURNS Potential for better long-term performance with higher income and lower risk.
SPAI vs S&P 500 Total Return (Annualized as of Dec. 31, 2018) 15%
10%
5%
0%
SPAI vs S&P 500 Volatility (Annualized as of Dec. 31, 2018) 18% 16% 14%
11.75% 12% 10%
8% 6% 4% 2% 0%
SPAI Index
S&P 500 Index
1See methodology for the S&P 500 Dividend Aristocrats Index at
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Cboe S&P 500? Dividend Aristocrats Target Income Index
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Indexes
Weekly vs. Monthly Option-Writing
Option Value
Percentage of Portfolio Overwrite Required to Reach a Target 3.5% Annualized Yield
Value (%) Overwrite (%)
4%
3%
0.81%
2%
0.81%
0.81%
1%
1.70%
0.81%
0%
100.0%
100.0%
Strike as Percent of Stock Price
Weekly Option 1 Weekly Option 4
Weekly Option 2 Monthly Option
Weekly Option 3
20% 18% 16% 14% 12% 10%
8% 6% 4% 2% 0%
100.0%
Strike as Percent of Stock Price
Weekly Option
Monthly Option
Note: Hypothetical Black-Scholes option calculation, assumes a 2.5% annual dividend yield, 1% annual risk-free rate and 15% annualized volatility.
The potential to collect premiums from weekly options four times per month can add up to more than the premium of monthly options.
The larger premiums from weekly options allow a smaller percentage of the portfolio to be overwritten to achieve the same targeted yield as monthly options.
At-the-Money (ATM) Call Option Values by Days to Expiration2
Time decay accelerates as expiry approaches, with approximately half of the time-value decaying in the last seven days, so weekly options investors capture approximately half the time value of the monthly option four times as frequently. All else being equal, this gives investors twice the time value of the monthly option.
1.80%
0.40%
1.35%
0.30%
Call Value (%)
Decline in Call Value
0.90%
0.20%
0.45%
0.10%
0.00%
Days to Expiry
Call Value (%)
Change in Call Value
0.00%
2Hypothetical calculation of European call option value assumes a 2.5% annual dividend yield, 1% annual risk-free rate and 15% annualized volatility.
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Cboe S&P 500? Dividend Aristocrats Target Income Index
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Indexes
Dividend Aristocrats Target Income Strategy: An Illustration of How It Works
? Income is generated from dividends and option premiums. ? Growth comes from participation in future stock price changes. ? The number of call options overwritten per unit of stock exposure is varied
SOURCE OF INCOME Dividend Income Option Income
SOURCE OF GROWTH Participation in Future Stock Price Changes
periodically, with the goal of generating a total yield from dividends and call option premiums that is 3.5% per annum higher than the yield from dividends of the S&P 500 Index.
? As the percentage of each stock overwritten increases, the percentage of
TOTAL INCOME = X% + Y% Goal: 3.5% over the annual dividend
yield of the S&P 500 Index
X% dividends
YY%% option premium
Partial Participation in Future Upside
participation in future upside decreases.
? Historically (from 2/3/2006 to 12/31/2018), the overwrite percentage has varied
between 1.05% and 9.06%.
Full Participation
in Future Downside
Note: This is a hypothetical illustration of the Index methodology. This is not an indication of the performance of the Index.
Hypothetical Scenarios: Index Performance
Here's an example of how a partial overwrite strategy on a reference stock would perform under different scenarios for returns of the reference stock with a target income of 3.5%, which results in an overwrite of 15% from one option roll date to the next (typically one week).
Reference Stock: -10.0% Strategy Total Return: -6.5%
30.0%
22.5%
15.0%
7.5%
0%
3.5%
Reference Stock: +10.0% Strategy Total Return: +12.0%
Reference Stock: +25.0% Strategy Total Return: +24.8%
10.0%
3.5% 8.5%
25.0%
3.5% 21.3%
-7.5%
-10.0% -10.0%
-15.0%
Reference Stock
Strategy Price Return
Target Income
Index Calendar Returns Against the S&P 500 Index Total Return
(Feb. 3, 2006 - Dec. 31, 2018)
As of December 31, 2018 Source: Bloomberg
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Cboe S&P 500? Dividend Aristocrats Target Income Index
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Indexes
Percent of Portfolio Overwritten
Index Performance and Percent Overwrite (Feb. 3, 2006 - Dec. 31, 2018)
Cboe S&P 500 Dividend Aristocrats Target Income Index (SPAI) performance and comparison to the S&P 500 Index Total Return (SPXT), along with the percentage of each stock overwritten in the SPAI Index.
Index Performance
SPXT
SPAI
SPAI Percent Overwrite
$400,000
50%
45% $350,000
40% $300,000
35%
$250,000
30%
$200,000
25%
20% $150,000
15% $100,000
10%
$50,000
5%
$0
0%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Annualized returns and historical volatility of the Cboe S&P 500 Dividend Aristocrats Target Income Index and comparison to the S&P 500 Index Total Return and annualized historical volatility.
SPAI INDEX
Annual Historical Return Volatility
2018
-3.12%
1 YEAR
-3.12%
3 YEAR
5 YEAR
10 YEAR
SINCE 2/3/2006
9.41% 8.86% 13.43%
10.05%
As of Dec. 31, 2018
14.47% 11.42% 11.75% 14.49%
16.88%
Return/ Risk
-0.22 0.82 0.75 0.93 0.60
SPXT INDEX
Annual Historical Return Volatility
-4.38%
-4.38% 9.26% 8.49% 13.12%
17.03% 12.99% 13.23% 16.64%
7.69%
19.29%
Return/ Risk
-0.26 0.71 0.64 0.79 0.40
Please visit Index for more details.
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are available from your broker or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606 or . The Cboe S&P 500 Dividend Aristocrats Target Income Index (the "Index") is designed to represent a proposed hypothetical buy-write strategy. Like many passive indexes, the Index does not take into account significant factors such as transaction costs and taxes and, because of factors such as these, many or most investors should be expected to underperform passive indexes. In the construction of the Index, the options components are assumed to be purchased and sold at a certain price on the last business day of the week at the close of the market. However, there is no guarantee that all investors will be able to buy or sell at this price, and investors attempting to replicate the Index should discuss with their brokers possible timing and liquidity issues. Transaction costs and taxes for a strategy such as the Index could be significantly higher than transaction costs for a passive strategy of buying-and-holding stocks. Investors should consult their tax advisor as to how taxes affect the outcome of contemplated options transactions. Past performance does not guarantee future results. All information for the Index prior to its launch date is backtested to calculate how the Index might have performed based on the methodology that was in effect on the launch date. Backtested performance information is purely hypothetical and is provided solely for informational purposes. Backtested performance does not represent actual performance and should not be interpreted as an indication of actual performance. No representation is being made that any investment will or is likely to achieve a performance record similar to that shown. It is not possible to invest directly in an index. Cboe Exchange, Inc. calculates and disseminates the Index. The information in this paper is provided for general education and information purposes only. No statement within this paper should be construed as a recommendation to buy or sell a security or to provide investment advice. Your use of, and access to, this paper is subject to the Terms and Conditions for Use of Cboe Websites located at . aspx. The methodology of the Index is the property of Cboe Exchange, Inc. Cboe? is a registered trademark, and SPAISM and BuyWriteSM are service marks of Cboe Exchange, Inc. S&P 500? is a registered trademark of Standard & Poor's Financial Services, LLC and has been licensed for use by Cboe Exchange, Inc. Financial products based on S&P indices are not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in such products. ? 2019 Cboe Exchange, Inc. All rights reserved.
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