The Relationship of the VIX Index and the Monthly Gross Premiums Generated by the BXM Index; Introducing the “Rule of 10”

Some investors who are new to options have asked these questions:

  • How can I determine how much premium will be generated by a covered call strategy?
  • Is a high VIX level related to high option premiums?
  • If VIX is at a high level, does that mean that a covered call strategy will perform well?

Many factors can influence the premiums generated by different covered call strategies, and a high VIX level does not guarantee that covered calls will have great performance. (For more general options education, please visit

The CBOE S&P 500 BuyWrite Index (BXM) sells one-month S&P 500 index options at mid-day on the third Friday of every month, while the CBOE Volatility Index® (VIX® ) is designed reflect market expectations of 30-day volatility conveyed by S&P 500 stock index option prices.

One could use a “Rule of 10” to try gain the following approximation — if you take the VIX and divide by 10, the resulting number should give you an approximate estimate of the BXM gross monthly premium as a percentage of the S&P 500 Index.  Please see the two charts below for more details.

The two charts above used the term “Gross Premiums” because the numbers shown are not net returns.  Please see the table below to see some relationships between VIX levels and the annual percentage change in value of the BXM and S&P 500 indexes.  Note that in 2008, for example, (1) the VIX had its highest average daily closing values, (2) even though the BXM generated relatively high gross premiums that year, the BXM was down 28.8% that year.  The premiums generated by the BXM Index helped the BXM avert the 37% loss endured by the S&P 500 Index in 2008.


This week the investment advisory firm Asset Consulting Group published a new six –page paper “An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns” (available at

Exhibit 12 of the paper notes that the BXM call premiums sold averaged about 1.8% per month since June 1988.

Exhibit 13 of the paper notes that “the average value for implied volatility (as represented by VIX) was 20.27 and the average value for realized volatility was 16.38. A number of studies have shown that the implied volatility inherent in index options prices generally has exceeded subsequent realized volatility over multi-year periods (see Richly priced index options could provide advantages to the option seller.”

Visit for (1) links to several papers that discuss implied and realized volatility, and (2) more information about risk disclosures (e.g., past performance is not a guarantee of future returns).

The posts on this blog are opinions, not advice.
Please read our disclaimer for Indices.

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