What You Need to Know About Cboe’s New Options on Select Sectors

February 7, 2019

Today, Cboe Global Markets announced the rollout schedule of new large-sized, cash-settled options on 11 Select Sector Indexes from February 7 through 14. The first options on the Materials Select Sector Index launched today.

There are several key features of the options that users may find appealing, including:

  • Efficient Exposure to U.S. Industry Sectors: With special appeal for investors seeking an alternative to ETF options, including European customers constrained by certain European regulations
  • Larger Notional Exposure 
  • Cash Settled and No Early Exercise (European Style) 
  • Potential Tax Advantages 

Index options allow investors to easily capitalize on wider industry trends by executing sector rotation, relative value and dispersion or correlation strategies without picking individual stocks. Index options also allow investors to hedge or express a directional view without the operational overhead of shorting an ETF or stock basket.

Some of the simpler index options strategies used by investors include:

(1) buying index puts to hedge the value of a portfolio,

(2) buying index collars to protect a portfolio,

(3) buying index calls to participate in market advances, and

(4) selling cash-secured index put options, which can offer exposure to a market index, premium collection and interest on collateral. 


In implementing sector allocation and sector rotation strategies, portfolio managers often engage in fundamental analysis to gauge the relative attractiveness of various sectors. Sectors with higher dividend yields may become more desirable in bearish markets. For example, in the below chart, the dividend yields for the Utilities and Real Estate sectors are about twice the amount of the dividend yields for the Tech and Communications sectors.


Cash-settled index options on select sectors may be valuable tools for asset allocation among sectors and for income generation. They also can be used in conjunction with sector rotation strategies. The Regimes table below groups the 11 Select Sectors and the S&P 500 Index into three groups based on estimated dividend yields of 1) more than 3%, 2) between 2 and 3% and 3) less than 3%, demonstrating their performance during up- and down-market cycles. While high-dividend sectors can be appealing in sluggish or bearish markets, note that in the second Up Period, (the 107-month up-period after March 2009), the Select Sectors with dividend yields over 3% (Utilities, Energy and Consumer Staples) all underperformed the eight sectors with lower dividend yields. Many of the Sectors with lower dividend yields have growth stocks that can do well in bullish markets. 


Index options can serve as valuable tools for controlling and harnessing volatility, and the chart below demonstrates how volatility can vary among the sectors. While those who lived through the dot.com bubble 20 years ago may still assume that all technology stocks are highly volatile, analysis of the long-term historic volatility of sectors tells a different story. For example, let’s take a look at the historic volatility of three indexes from 1998: Technology (SIXT), Energy (SIXE) and the SPX Index. In 2001 and 2002, the historic volatility for SIXT averaged above 40 -- much higher than the average historic volatility for SIXE and SPX. On the other hand, in 2008 and 2009, the historic volatility for SIXE averaged above 50 and was much higher than the average historic volatility for SIXT and SPX. Index options allow investors to easily manage risk or capitalize on these industry volatility trends.


How do disruptive changes in political parties and policies impact sector performance and dispersion among sectors? The next chart shows some very interesting price movements and dispersion during the U.S. election month of November 2016. (Shout out to Tim Edwards of S&P Dow Jones Indices, who presented a similar chart at a 2018 Cboe Risk Management Conference.) While the Select Sectors moved pretty closely in tandem November 1 through 7, in the week after the November 8 election, there was tremendous dispersion in the performance of various Select Sectors, with six sectors rising and five sectors falling. For example, over a period of four trading days (from the close on November 8 to the close on November 14), the Financial Select Sector (SIXM) rose 10.8% and the Utilities Select Sector (SIXU) fell 6.5%.  


All 11 Select Sectors fell in the volatile month of December 2018, as the Energy Sector had a peak-to-trough drawdown of 20%. However, all 11 Select Sectors rebounded and rose in January 2019, as four Select Sectors (SIXI, SIXE, SIXRE and SIXC) rose by more than 10% last month.


To learn more about ways in which cash-settled options on Select Sectors and other stock indexes can be used in portfolio management, please visit www.cboe.com/sectors.

For client testimonials and to read how other asset managers are implementing sector strategies, click here.