Let’s exclude all the historical data that would impact our strategy the most negatively, that way we can peddle the system on an unsuspecting public. BRILLIANT!
A spokesman from the CBOE sent me this note in response to why the CBOE didn’t include pre-1988 results in their option selling indices. I disagree completely of course (especially with the last paragraph). I did a quick calculation and found that the yearly returns of the two indices are over 97% correlated.
“Dear Mr. Faber
The inception date of the PUTWrite index (June 1988) was selected to match the inception date of the BXM in order to provide a better comparison of their relative performance.”
Ok. Why did the BXM start in 1988?
“Daily prices are provided in an historical return series for the BXM Index beginning June 1, 1988 (the first day that Standard and Poor’s began reporting the daily cash dividends for the S&P 500 index portfolio) up through the present time. The daily prices are available at www.cboe.com/bxm, and from quote vendors that provide options data.”
How about monthly data?
“The BXM is calculated daily by compounding at the daily rate of return and this rate incorporates whatever dividends went ex that day. Spreading monthly dividends over the days of the month would have produced a less accurate rate. That was the deciding factor.
But also note that it is common practice in academic papers to exclude the fall of 1987 precisely because it was such an extreme tail event. I concur with this point of view because I believe that an event of this magnitude is unlikely to reoccur given all the circuit breaker mechanisms put in place in 1989. Including 1987 would almost surely provide a less informative picture of likely future performance.”
