How Target Outcome Indices May Help Investors Minimize Risk and Target Returns
As any exchange, brokerage or asset manager will tell you, there is inherent risk in investing. But what if you could minimize that risk and target returns? It may sound too good to be true, but that’s the concept behind Cboe’s Target Outcome Indices.
Target Outcome Indices are options-based strategy benchmarks designed to provide targeted returns relative to a referenced U.S. domestic stock market index, and in the case of buffer protect strategies, to limit downside risk.
Cboe’s current lineup of Target Outcome Indices, includes more than 115 indices, each designed to minimize risk and lock in growth. Most recently, Cboe expanded its family of Target Outcome Indices with the addition of two series of indices tied to the Russell 2000 Index: the Cboe Russell 2000 Enhanced Growth Index Series (RPEN) and Cboe Russell 2000 Buffer Protect Index Series (RPRO).
These indices measure the performance of a hypothetical portfolio of FLexible EXchange® (FLEX®) Options, which are customizable contracts that allow users to specify key contract terms, including strike prices, exercise styles and expiration dates. The hypothetical portfolio aims to provide exposure to the Russell 2000 Index, where the downside protection, upside growth potential and outcome period are all pre-determined.
Each of the indices track the return of a hypothetical investment portfolio designed to generally track the Russell 2000 Index, using two different strategies.
The enhanced growth target outcome strategy provides 2x the appreciation of the Russell 2000 Index up to a cap level, which is determined on each annual option roll date. Enhanced growth target outcome strategies are based on a one-year period and can be used in most market environments as long-term growth tools, or tactically, in modest bull or range-bound market environments.
The buffer protection target outcome strategy provides protection against the first 10 percent of losses due to a decline in the Russell 2000 Index, over a one-year period. Buffer protection target outcome strategies can be used as a risk management tool, or tactically, in bear or range-bound markets.
Using these strategies, the Cboe Russell 2000 Enhanced Growth Index Series (RPEN) and Cboe Russell 2000 Buffer Protect Index Series (RPRO) each include a series of 12 monthly indices comprised of hypothetical investments of FLEX Options that are rolled into new positions at annual expirations. A composite index is compiled giving equal weight to the returns of the 12 monthly indices.
The series were developed in response to customer demand for more options-based strategies that provide a combination of growth potential and downside risk mitigation. Cboe and FTSE Russell leveraged their combined strengths in index development and derivatives trading to deliver an innovative way for market participants to gain exposure to the Russell 2000 Index.
Visit Cboe’s website for more information.
The information in this article is provided for general education and information purposes only. No statement(s) within this article should be construed as a recommendation to buy or sell a security or to provide investment advice. Supporting documentation for any claims, comparisons, statistics or other technical data in this article is available by contacting Cboe Global Markets at cboe.com/Contact.
Cboe is a registered trademark of Cboe Exchange, Inc.
The Russell 2000 Index: the Cboe Russell 2000 Enhanced Growth Index Series (RPEN) and Cboe Russell 2000 Buffer Protect Index Series (RPRO)are designed to represent proposed hypothetical options strategies. The actual performance of investment vehicles such as mutual funds or managed accounts can have significant differences from the performance of the Indexes. Investors attempting to replicate the Indexes should discuss with their advisors possible timing and liquidity issues. Like many passive benchmarks, the Indexes do not take into account significant factors such as transaction costs and taxes. Transaction costs and taxes for strategies such as the Indexes 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. It is not possible to invest directly in an index. Cboe Global Indices, LLC calculates and disseminates the Indexes.
© 2020 Cboe Exchange, Inc. All Rights Reserved.