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July 2014
S&P Dow Jones Indices: Index Methodology
Table of Contents
Introduction
3
Highlights
Definitions
Index Construction
Approaches
Index Calculations
Index Maintenance
10
Rebalancing
10
Inclusion Criteria
10
Index Governance
Index Committee
Index Policy
11
11
12
Announcements
Index Dissemination
Tickers
12
13
13
14
Index Management
14
Product Management
14
Media Relations
14
Client Services
14
Disclaimer
15
S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
S&P Dow Jones Indices shall have no liability, contingent or otherwise, to any person or
entity for the quality, accuracy, timeliness and/or completeness of the information, the
S&P GSCI or any data included in this S&P GSCI Covered Call Select Index
Methodology, or for delays, omissions or interruptions in the delivery of the S&P GSCI
Covered Call Select or data related thereto. S&P Dow Jones Indices makes no warranty,
express or implied, as to the results to be obtained by any person or entity in connection
with any use of the S&P GSCI, including but not limited to the trading of or investments
in products based on or indexed or related to the S&P GSCI, any data related thereto or
any components thereof. S&P Dow Jones Indices makes no express or implied
warranties, and hereby expressly disclaims all warranties of merchantability or fitness
for a particular purpose or use with respect to the information, the S&P GSCI or any
data related thereto. Without limiting any of the foregoing, in no event shall S&P have
any liability for any special, punitive, indirect, or consequential damages (including lost
profits), in connection with any use by any person of the S&P GSCI or any products
based on or indexed or related thereto, even if notified of the possibility of such damages.
S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
Introduction
The S&P GSCI Covered Call Select Index (the Index) seeks to simulate a covered call
strategy on a select number of the commodities from the S&P GSCI with the most active
options markets.
This methodology was created by S&P Dow Jones Indices to achieve the aforementioned
objective of measuring the underlying interest of each index governed by this
methodology document. Any changes to or deviations from this methodology are made in
the sole judgment and discretion of S&P Dow Jones Indices so that the index continues to
achieve its objective.
Highlights
A covered call strategy is an income generating strategy that is generally used in a
neutral-to-bullish market environment, where a slow and steady rise in market prices is
anticipated.
Ten commodities are included in the S&P GSCI Covered Call Select Index -- Coffee,
Corn, Cotton, Crude Oil, Gold, Natural Gas, Silver, Soybeans, Sugar and Wheat.
For each of the commodities included in the Index, a separate covered call index is
created. Each such index reflects an investment in the rolling active futures contract and
the systematic writing (selling) of out-of-the-money (OTM) calls on the same contract.
Each such index seeks to provide higher returns than the corresponding S&P GSCI index
of the same commodity, with lower volatility in most market environments with the
exception of when the futures market is rallying rapidly.
The ten individual covered call indices are, then, included in a composite covered call
index, on an equal-weighted basis.
The S&P GSCI Covered Call Select Index Methodology
This methodology uses various terms and definitions from the S&P GSCI Index
Methodology. Where not specifically noted otherwise in this document, the rules of the
S&P GSCI Methodology will prevail. Where the terms in this document are also defined
in the S&P GSCI Methodology, the definitions in this document prevail.
S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
Definitions
Call option. A contract between a buyer and seller whereby the buyer acquires the right,
but not the obligation, to purchase a specific security at a fixed price on or before a
specified date. The seller of the call assumes the obligation of delivering the security.
Strike price. The price at which the underlying will be delivered in the event the option
is exercised.
Volatility. The degree to which the price of an underlying security tends to fluctuate
over time.
S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
Index Construction
Approaches
Each of the individual covered call indices is calculated on a hypothetical portfolio
consisting of a long futures position and a short OTM call position, both of which are
rolled based on the S&P GSCI Covered Call Designated Contract Expiration calendar
(Table 1). The futures and options roll over a five-day period, starting on the first
business day of each month.
Index Calculations
Calculating the Total Return of the Portfolio of an individual covered call index
The index is calculated based on the total return of a hypothetical portfolio consisting of a
long futures position and a short OTM call. If its not during a roll period, the return and
the index value are calculated as follows:
Rt =
Ft C t
1
Ft 1 C t 1
I t = I t 1 ( 1 + Rt )
(1)
where:
Rt = Index return on day t
It = Index level on day t
Ft = Closing price of the futures contract on day t
Ft-1 = Closing price of the futures contract on day t-1
Ct = Closing price of the call option on day t
Ct-1 = Closing price of the call option on day t-1
Five Day Roll
Commodity futures and options are not held to maturity. Instead, the long futures and
short options positions roll to the next Designated Contract Expiration Month over a fiveday period, with 20% being replaced every business day. The roll period is the first five
business days of each month. The option chosen to be rolled into is always based on the
same contract month as the futures that are being rolled into. With the substitution of the
roll during the 1st through the 5th business days for the S&P GSCI Covered Call Select
index, the roll rules and procedures followed are those as specified in the S&P GSCI
Methodology, sections VI.2(b), VI.2 (c) and VI.2 (d).
S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
Table 1: Contracts Included in the S&P GSCI Covered Call Select Index
Covered Call Futures and Options Roll Schedule
Trading
Facility
Commodity
(Contract)
Ticker
NYM / ICE
NYM / ICE
CBT
CBT
CBT
ICE - US
ICE - US
ICE - US
CMX
CMX
CL
NG
W
C
S
SB
KC
CT
GC
SI
Month: 1
H0
H0
H0
H0
H0
H0
H0
H0
G0
H0
2
J0
J0
H0
H0
H0
H0
H0
H0
J0
H0
3
K0
K0
K0
K0
K0
K0
K0
K0
J0
K0
4
M0
M0
K0
K0
K0
K0
K0
K0
M0
K0
5
N0
N0
N0
N0
N0
N0
N0
N0
M0
N0
6
Q0
Q0
N0
N0
N0
N0
N0
N0
Q0
N0
7
U0
U0
U0
U0
X0
V0
U0
Z0
Q0
U0
8
V0
V0
U0
U0
X0
V0
U0
Z0
Z0
U0
9
X0
X0
Z0
Z0
X0
V0
Z0
Z0
Z0
Z0
10
Z0
Z0
Z0
Z0
X0
H1
Z0
Z0
Z0
Z0
Note 1: Future and option Months included in the S&P GSCI Covered Call Select Index that are rolled into during the
calendar month, starting with January 2010. Month letter codes are shown in Table 2.
Letter Code
F
G
H
J
K
M
N
Q
U
V
X
Z
S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
11
F1
F1
Z0
Z0
F1
H1
Z0
Z0
Z0
Z0
12
G1
G1
H1
H1
F1
H1
H1
H1
G1
H1
ri =
Si
1
S i 1
ri =
1 20
ri j
21 j =0
stdev =
1 20
( ri j ri ) 2
20 j =0
(2)
where:
Si = Closing price of the S&P GSCI Spot Index on the ith trading day
ri = Daily return of the S&P GSCI Spot Index on the ith trading day
ri = The 21-day average daily return of the S&P GSCI Spot Index on the ith trading
day
The strike of the new call option, K, is 1 vol above the close of the futures contract to be
rolled into on the last trading day of each month.
K = Ft new (1 + vol )
S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
(3)
where:
Ft new = Closing price of the futures contract to be rolled into.
If the calculated strike price, K, falls between two option strikes, the call option that is
immediately above K is chosen
An example of strike determination, for Crude Oil:
Date: April 30th 2009
The index will begin rolling into the July futures and options on May 1st 2009
July crude oil futures settlement price on April 30th = $52.28/bbl
21-day historic volatility of the S&P GSCI Spot Crude Oil Index on April 30th =
54.73%
Calendar days to options expiration on April 30th = 48 days
Target strike = $52.28/bbl + (52.28 * 54.73% * sqrt(48 / 365)) = $62.66/bbl
On May 1st, the index begins rolling into a long position in the July futures and a
short position in the July 63 calls.
Five-Day Staggered Roll
The roll period starts on the first business day of each calendar month. With each
successive day, 20% of the expiring futures and options are replaced by the new contracts
at the close and assumed official settlement prices. Exhibit 1 shows an example of the
weights of the two maturities.
Roll Out
200907
200907
200907
200907
200907
200907
Weight
100%
80%
60%
40%
20%
0%
Roll In Weight
0%
200908
20%
200908
40%
200908
60%
200908
80%
200908 100%
The return of the portfolio and the index value are calculated as follows:
new
C tnew )
Wt old1 ( Ft old C told ) + Wt new
1 ( Ft
1
Rt = old old
new
new
new
Wt 1 ( Ft 1 C told
1 ) + Wt 1 ( Ft 1 C t 1 )
(4)
I t = I t 1 ( 1 + Rt )
where:
Wt new = Weight of the new futures / options
Ft new = Closing price of the new futures
S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
PI t = PI t 1 (1 + PRt )
where:
PRt = Total Return of the Portfolio on day t
PIt = Portfolio Index on day t
Rt c = Return of Commodity c on day t
DWt c= Daily Weight of Commodity c on day t
S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
Index Maintenance
Rebalancing
The S&P GSCI Covered Call Select Index and its representative constituents are
reviewed on an annual basis along with the parent S&P GSCI during the January roll
period. Weights used in the composite index are reset to equal once a year, on the S&P
GSCI Business Day prior to the beginning of the January roll period.
Inclusion Criteria
The S&P GSCI Covered Call Select Index selects its constituents from the S&P GSCI
candidates. Commodity candidate annual options volume must be a minimum of 10% of
the underlying commodity annual volume to be considered for inclusion in the S&P
GSCI Covered Call Select Index. The S&P GSCI annual volume measurement period is
generally from September to August of the most recent prior year at each January review.
S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
10
Index Governance
Index Committee
The S&P GSCI Committee maintains the S&P GSCI Covered Call Select Index. The
Index Committee meets regularly. At each meeting, the Index Committee reviews any
significant market events. In addition, the Index Committee may revise index policy for
timing of rebalancings or other matters.
S&P Dow Jones Indices considers information about changes to its indices and related
matters to be potentially market moving and material. Therefore, all Index Committee
discussions are confidential.
For information on Quality Assurance and Internal Reviews of Methodology, please refer
to S&P Dow Jones Indices Commodities Indices Policies & Practices document located
under the Resource Center on our Web site, www.spdji.com.
S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
11
Index Policy
Announcements
Announcements of the daily index values are made after the futures market close each
day.
Announcements of the new call strike price to be rolled into are made following the close
of business on the last business day of each month.
The index is calculated daily when the various commodity exchanges are open for
official trading and official settlement prices are provided, excluding holidays and
weekends.
In situations where an exchange is forced to close early due to unforeseen events, such as
computer or electric power failures, weather conditions or other events, S&P Dow Jones
Indices will calculate the value of the index based on most recent option price published.
If an exchange fails to open due to unforeseen circumstances, S&P Dow Jones Indices
may determine not to publish the index for that day.
For information on Calculations and Pricing Disruptions, Expert Judgment, Data
Hierarchy and Unexpected Exchange Closures, please refer to S&P Dow Jones Indices
Commodities Indices Policies & Practices document located under the Resource Center
on our Web site, www.spdji.com.
S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
12
Index Dissemination
Historical index returns are available through S&P Dow Jones Indices index data group
for subscription via FTP.
Tickers
Index
S&P GSCI Covered Call Select Index Spot
S&P GSCI Covered Call Select Index Excess Return
S&P GSCI Covered Call Select Index Total Return
S&P GSCI Covered Call Chicago Wheat Index Spot
S&P GSCI Covered Call Chicago Wheat Index Excess Return
S&P GSCI Covered Call Chicago Wheat Index Total Return
S&P GSCI Covered Call Corn Index Spot
S&P GSCI Covered Call Corn Index Excess Return
S&P GSCI Covered Call Corn Index Total Return
S&P GSCI Covered Call Soybeans Index Spot
S&P GSCI Covered Call Soybeans Index Excess Return
S&P GSCI Covered Call Soybeans Index Total Return
S&P GSCI Covered Call Sugar Index Spot
S&P GSCI Covered Call Sugar Index Excess Return
S&P GSCI Covered Call Sugar Index Total Return
S&P GSCI Covered Call Crude Oil Index Spot
S&P GSCI Covered Call Crude Oil Index Excess Return
S&P GSCI Covered Call Crude Oil Index Total Return
S&P GSCI Covered Call Natural Gas Index Spot
S&P GSCI Covered Call Natural Gas Index Excess Return
S&P GSCI Covered Call Natural Gas Index Total Return
S&P GSCI Covered Call Gold Index Spot
S&P GSCI Covered Call Gold Index Excess Return
S&P GSCI Covered Call Gold Index Total Return
S&P GSCI Covered Call Silver Index Spot
S&P GSCI Covered Call Silver Index Excess Return
S&P GSCI Covered Call Silver Index Total Return
S&P GSCI Covered Call Coffee Index Spot
S&P GSCI Covered Call Coffee Index Excess Return
S&P GSCI Covered Call Coffee Index Total Return
S&P GSCI Covered Call Cotton Index Spot
S&P GSCI Covered Call Cotton Index Excess Return
S&P GSCI Covered Call Cotton Index Total Return
S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
Bloomberg
SPCLCI
SPCLCIP
SPCLCITR
SPCLWH
SPCLWHP
SPCLWHTR
SPCLCN
SPCLCNP
SPCLCNTR
SPCLSO
SPCLSOP
SPCLSOTR
SPCLSB
SPCLSBP
SPCLSBTR
SPCLCL
SPCLCLP
SPCLCLTR
SPCLNG
SPCLNGP
SPCLNGTR
SPCLGC
SPCLGCP
SPCLGCTR
SPCLSI
SPCLSIP
SPCLSITR
SPCLKC
SPCLKCP
SPCLKCTR
SPCLCT
SPCLCTP
SPCLCTTR
13
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S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
14
Disclaimer
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These materials have been prepared solely for informational purposes based upon
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S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
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As a result, certain business units of S&P Dow Jones Indices may have information that
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S&P Dow Jones Indices: S&P GSCI Covered Call Select Index Methodology
16