Monday, December 03, 2012

New Low Vol Index

This one is a bit too cute for me. The CBOE LOVOL Index combines a portfolio of SP 500 stocks and simultaneously selling SPX calls and buying one-month VIX 30-delta calls on a monthly basis. The LOVOL mix of VIX and SPX options reduces the chance of shortfalls below -10% but still preserves the bulk of market gains. By construction, the LOVOL delivers returns between the BXM and VXTH, or a risk profile between a cushion and a tail hedge.

The key seems to be reflected in the following total return chart above, where you have the new index in orange, the SPY in white. The low vol index generated a lower downturn in the 2008 recession. Alas, these are indices created post-2008, so they overstate the benefits (backtest always look better than real-time). Further, the benefits are pretty small, just in really big downturns...perhaps.


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