Description of the CBOE Russell 2000 BuyWrite Index (BXR SM )
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1 Descripion of he CBOE Russell 2000 BuyWrie Index (BXR SM ) Inroducion. The CBOE Russell 2000 BuyWrie Index (BXR SM ) is a benchmark index designed o rack he performance of a hypoheical a-he-money buy-wrie sraegy on he Russell 2000 Index. The BXR is a passive oal reurn index based on (1) buying a Russell 2000 sock index porfolio, and (2) "wriing" (or selling) a near-erm Russell 2000 Index (RUT) "covered" call opion, generally on he hird Friday of each monh. The CBOE calculaes he BXR using he same mehodology as for he BXM. The BXR hisorical series is calculaed using he BXM mehodology used prior o June 18, Saring on May 19, 2006, he BXR is calculaed using he revised BXM mehodology in place since June 18, As explained in more deail below, on he hird Friday of he monh, he new Russell 2000 call opion is deemed sold a a price equal o he volume-weighed average of he raded prices ( VWAP ) of he new call opion during he half-hour period beginning a 11:30 a.m. Easern Time. For more informaion on he BXR Index, please visi he websie or send an o insiuional@cboe.com. Index Design. The CBOE Russell 2000 BuyWrie Index (he BXR or he BXR Index SM ) measures he oal rae of reurn of a hypoheical covered call sraegy applied o he Russell 2000 Index. This sraegy, which we refer o as he BXR covered call sraegy, consiss of a hypoheical porfolio consising of a long posiion indexed o he Russell 2000 Index on which are deemed sold a succession of one-monh, a-hemoney call opions on he Russell 2000 Index lised on he Chicago Board Opions Exchange (CBOE). We refer o his hypoheical porfolio as he covered Russell 2000 Index porfolio. The BXR Index provides a benchmark measure of he oal reurn performance of his hypoheical porfolio. Dividends paid on he componen socks underlying he Russell 2000 Index and he dollar value of opion premium deemed received from he sold call opions are funcionally re-invesed in he covered Russell 2000 Index porfolio. The BXR Index is based on he cumulaive gross rae of reurn of he covered Russell 2000 Index porfolio since he incepion of he BXR Index. On is base dae, December 29, 2000, he BXR value is 100.
2 The BXR covered call sraegy requires ha each Russell 2000 Index call opion in he hypoheical porfolio be held o mauriy, generally he hird Friday of each monh. The call opion is seled agains he Special Opening Quoaion (or SOQ, icker RLS ) of he Russell 2000 Index used as he final selemen price of Russell 2000 Index call opions 1. The SOQ is a special calculaion of he Russell 2000 Index ha is compiled from he opening prices of componen socks underlying he Russell 2000 Index. The SOQ calculaion is performed when all socks underlying he Russell 2000 Index have opened for rading 2. The final selemen price of he call opion a mauriy is he greaer of 0 and he difference beween he SOQ minus he srike price of he expiring call opion. Subsequen o he selemen of he expiring call opion, a new a-he-money call opion expiring in he nex monh is hen deemed wrien, or sold, a ransacion commonly referred o as a roll. The srike price of he new call opion is he Russell 2000 Index call opion lised on he CBOE wih he closes srike price above he las value of he Russell 2000 Index repored before 11:00 a.m. ET 3. For example, if he las Russell 2000 Index value repored before 11:00 a.m. ET is and he closes lised Russell 2000 Index call opion srike price above is 750, hen he 750 srike Russell 2000 Index call opion is seleced as he new call opion o be incorporaed ino he BXR Index. The long Russell 2000 Index componen and he shor call opion componen are held in equal noional amouns, i.e., he shor posiion in he call opion is covered by he long Russell 2000 Index componen. Once he srike price of he new call opion has been idenified, he new call opion is deemed sold a a price equal o he volume-weighed average of he raded prices ( VWAP ) of he new call opion during he half-hour period beginning a 11:30 a.m. ET. 4 The CBOE calculaes he VWAP in a wo-sep process: firs, he CBOE excludes rades in he new call opion beween 11:30 a.m. and 12:00 p.m. ET ha are idenified as having been execued as par of a spread, and hen he CBOE calculaes he weighed average of all remaining ransacion prices of he new call opion beween 11:30 a.m. and 12:00 p.m. ET, wih weighs equal o he fracion of oal non-spread volume ransaced a each price during his period. The source of he ransacion prices used in he calculaion of he VWAP is CBOE s Marke Daa Rerieval ( MDR ) Sysem 5. If no ransacions occur in he new call opion beween 11:30 a.m. and 12:00 p.m. ET, hen he new call opion is deemed sold a he las bid price repored before 12:00 p.m. ET. The 1 If he hird Friday is an exchange holiday, he call opion will be seled agains he SOQ on he previous business day and he new call opion will be seleced on ha day as well. 2 If one or more socks in he Russell 2000 Index do no open on he day he SOQ is calculaed, he final selemen price for RUT opions is deermined in accordance wih he Rules and By-Laws of he Opions Clearing Corporaion. 3 If he las value of he Russell 2000 Index repored before 11:00 a.m. ET is exacly equal o a lised Russell 2000 Index call opion srike price, hen he new call opion is he Russell 2000 Index call opion wih ha exac a-he-money srike price. 4 Beginning on May 19, 2006, he new call opion will be deemed sold a he VWAP price beween 11:30 a.m. and 12:00 p.m. ET. 5 Time & Sales informaion from CBOE s MDR Sysem is disseminaed hrough he Opions Price Reporing Auhoriy (OPRA) and is publicly available hrough mos price quoe vendors.
3 value of opion premium deemed received from he new call opion is funcionally reinvesed in he porfolio. Index Calculaion. The BXR Index is calculaed in real-ime by he CBOE every fifeen seconds during each rading day excluding roll daes [for he respecive componens of he covered Russell 2000 Index porfolio]. The BXR Index is a chained index, i.e., is value is equal o 100 imes he cumulaive produc of gross daily raes of reurn of he covered Russell 2000 Index porfolio since he base dae of he BXR Index. On any given day, he BXR Index is calculaed as follows: BXR BXR (1 + R ) = 1 where R is he daily rae of reurn of he covered Russell 2000 Index porfolio. This rae includes ordinary cash dividends paid on he socks underlying he Russell 2000 Index ha rade ex-dividend on ha dae. On each rading day excluding roll daes, he daily gross rae of reurn of he BXR equals he change in he value of he componens of he covered Russell 2000 Index porfolio, including he value of ordinary cash dividends payable on componen socks underlying he Russell 2000 Index ha rade ex-dividend on ha dae, as measured from he close in rading on he preceding rading day. The gross daily rae of reurn is equal o: 1 + R S + Div C ) /( S C ) = ( 1 1 In his equaion, S is he closing value of he Russell 2000 Index a dae, Div represens he ordinary cash dividends payable on he componen socks underlying he Russell 2000 Index ha rade ex-dividend a dae expressed in Russell 2000 Index poins, and C is he arihmeic average of he las bid and ask prices of he call opion repored before 4:00 p.m. ET a dae. S -1 is he closing value of he Russell 2000 Index on he preceding rading day and C -1 is he average of he las bid and ask prices of he call opion repored before 4:00 p.m. ET on he preceding rading day. On roll daes, he gross daily rae of reurn is compounded from hree gross raes of reurn, he gross rae of reurn from he previous close o he ime he SOQ is deermined 6 and he expiring call is seled; he gross rae of reurn from he SOQ o he iniiaion of he new call posiion and he gross rae of reurn from he ime he new call opion is deemed sold o he close of rading on he roll dae, expressed as follows: 1+ R = (1 + Ra ) (1 + Rb ) (1 + Rc ) 6 The SOQ of he Russell 2000 Index is frequenly no known unil lae in he day. This is because here are ofen a few of he componen socks ha never open. Hisorically, he Frank Russell Company has calculaed he SOQ of he Russell 2000 Index using he opening prices of hose componens ha have opened for rading, and he previous closing prices for socks ha have no opened. Since mos of he informaion needed o calculae he SOQ is known by 11:30 a.m. ET, he calculaion of he rae of reurn of he BXR on roll daes will proceed as if he SOQ is available by ha ime, when he calculaion of he VWAP of he new call and index begin.
4 where: 1+ a Sele 1 1 SOQ R = ( S + Div C ) /( S C ) ; VWAV SOQ 1+ R = ( S ) /( S ) ; and b VWAV 1+ Rc = ( S C ) /( S CVWAP ) In his equaion, R a is he rae of reurn of he covered Russell 2000 Index porfolio from he previous close of rading hrough he selemen of he expiring call opion. S SOQ is he Special Opening Quoaion used in deermining he selemen price of he expiring call opion. As previously defined, Div represens dividends on Russell 2000 Index componen socks deermined in he same manner as on non-roll daes, and C Sele is he final selemen price of he expiring call opion. S -1 and C -1 are deermined in he same manner as on non-roll daes. R b is he rae of reurn of he un-covered Russell 2000 Index porfolio from he selemen of he expiring opion o he ime he new call opion is deemed sold. S VWAV is he volume-weighed average value of he Russell 2000 Index based on he same ime and weighs used o calculae he VWAP in he new call opion R c is he rae of reurn of he covered Russell 2000 Index porfolio from he ime he new call opion is deemed sold o he close of rading on he roll dae. As defined above, S VWAV is he is he volume-weighed average value of he Russell 2000 Index based on he same ime and weighs used o calculae he VWAP in he new call opion. C VWAP is he volume-weighed average rading price of he new call opion beween 11:30 a.m. and 12:00 p.m. ET and C refers o he average bid/ask quoe of he new call opion repored before 4:00 p.m. ET on he roll dae.
5 The CBOE Russell 2000 BuyWrie Index (BXR) is designed o represen a hypoheical buy-wrie sraegy. Like many passive indexes, he BXR Index does no ake ino accoun significan facors such as ransacion coss and axes and, because of facors such as hese, many or mos invesors should be expeced o underperform passive indexes. In he consrucion of he hypoheical BXR index, he RUT calls are assumed o be wrien a a cerain price on he hird Friday of he monh. However, here is no guaranee ha all invesors will be able o sell a his price, and invesors aemping o replicae he BXR Index should discuss wih heir brokers possible iming and liquidiy issues. Transacion coss for a buy-wrie sraegy such as he BXR could be significanly higher han ransacion coss for a passive sraegy of buying-and-holding socks. Pas performance does no guaranee fuure resuls. Russell 2000 is a regisered rademark of The Frank Russell Company, used under license. CBOE and Chicago Board Opions Exchange are regisered rademarks of Chicago Board Opions Exchange, Incorporaed (CBOE), and SPX SM, BXM and BXR are servicemarks of CBOE. The mehodology of he CBOE Russell 2000 BuyWrie Index is owned by CBOE and may be covered by one or more paens or pending paen applicaions. Opions involve risk and are no suiable for all invesors. Prior o buying or selling an opion, a person mus receive a copy of Characerisics and Risks of Sandardized Opions (ODD). Copies of he ODD are available from your broker, by calling OPTIONS, or from The Opions Clearing Corporaion, One Norh Wacker Drive, Suie 500, Chicago, Illinois Supporing documenaion for claims, comparisons, recommendaions, saisics or oher echnical daa is available by calling OPTIONS, sending an o help@cboe.com, or by visiing
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