Performance Attribution of Options:

Defining Single-Stock Option

Exposures and Understanding the

T
A
Brinson-Fachler Effects

M
R
FO
STUART MORGAN

Y
N
A
IN
P
STUART MORGAN erformance attribution involves Individual securities (i.e., no

LE
is an analyst at Wingate breaking up an investment portfolio aggregation)
Asset Management in

C
into its constituent components in Asset type (i.e., cash, equities, puts,
Melbourne, Australia.

TI
stuart.morgan@wingategroup. order to analyze the drivers of the and calls)
portfolios performance. This article exam- Industry grouping (e.g., GICS sectors)

R
com.au
ines what information a performance analyst
may gain when analyzing a portfolio con-
A The first step in performance attribu-
IS
taining (single-stock) options. In particular, tion is to calculate the contributions to return
TH

the article discusses the following four basic for each component i, where i = 1, , n and
option strategies: there are n components in the portfolio. It is
E

therefore necessary to determine each com-

C

Long calls ponents weight or exposure wi, as well as the

U

Naked puts return r i from that component. These two

D

Covered calls factors yield the components contribution to

O

Protective puts return CTRi :

R
EP

There are countless ways in which to T i = w i ri

CTR (1)
R

aggregate the individual securities or com-

ponents of a particular portfolio in order to When the portfolio contains derivative
TO

analyze a portfolios performance. The idea instruments, it is sometimes the case that the
behind this is to group securities into sec- definitions of exposures and returns are ill-
L

tors, however they are defined, that tend to defined and/or non trivial. The performance
A

be somewhat correlated. A performance ana- analyst therefore has to choose which defini-
G

lyst will then be able to determine the degree tion to use. The overarching principle of this
LE

and sign of a portfolios relative performance article is that all choices made in the calcula-
tion of performance attribution should ref lect
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that is due to exposures to particular secu-

rities within the sectors, known as stock the portfolio managers investment style. If a
IS

selection, as well as the degree and sign of portfolio contains single-stock options, then
a portfolios relative performance that is due the choice of definition of exposure and
IT

to being over- or under-weighted in the sec- return should depend on how the portfolio
tors themselves, known as asset allocation. manager uses those options.
Some of the more common aggregations for
this type of portfolio are:

WINTER 2014 THE JOURNAL OF PORTFOLIO M ANAGEMENT 103

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 This article has two purposes: the first is to discuss Ai ( i i )( i ) (2a)
how single-stock options should be treated in attribu-
Si i (i i ) (2b)
tion analyses, including a proposal for a new method of
defining exposures for options. The second purpose is Ii ( i i )( i i ) (2c)
to discuss how the various attribution effects are affected
by the choice of component aggregation. For simplicity, The sum of the three BF attribution effects for the
the time frame will always be taken to be a single day, whole portfolio is equal to the relative performance of
and the portfolio will be taken to be a single-currency the portfolio against the benchmark:
portfolio (U.S. dollars), with no external f lows over
the period. This means that the arithmetic attribution r = i i
effects will add without the need to employ smoothing i i

algorithms. = ( i )(i + i i )
i i

RELATIVE ATTRIBUTION = S + ( i i )( i i ) + ( i i )i
i

In relative attribution, the exposures and returns, = S +I +

as well as an appropriate benchmark, need to be defined
for the portfolio. I will use Latin letters to refer to the
portfolio and its securities (with the exception of delta,
used for options in the usual way), and the corresponding
Greek letters to refer to the benchmark. The exposures
and returns for the benchmark will therefore be denoted
by i and i, respectively. If components are combined
arithmetically, the overall return r for the portfolio and
for the benchmark is the sum of the contributions to
return:
r = w i ri ; = i i effect as defined by Brinson et al. [1986].
The components are themselves made up of one
or more securities. The contribution to return of each
component can likewise be determined from the expo-
sures and returns of these securities. The exposure for a
component can be determined by simply summing the
exposures of the securities within that component. The
return of the component can be determined by either
calculating the weighted-average return of the securi-
ties, or simply dividing the contribution to return by the
exposure of the component.
The exposures and returns of the components of
a portfolio can be compared to that of the benchmark
in order to calculate various attribution effects. The most
( i i )
i i
=S+I +A
The final term of the second-to-last line is equal to
zero, since the sum of all over(under)weights of a port-
folio compared to a benchmark is zero. This term can
then be combined with the other remaining term by
bringing the benchmarks total returninside the
sum, yielding the Allocation effect. If the term was
not introduced into this line, then the remaining term of
the second-to-last line is actually equal to the Allocation
Securities can be aggregated in any number of
different ways to form the components or sectors
of a portfolio. In general, the BF effects will differ for
each choice of aggregation. For example, if a portfolio
has n number of sectors and j = 1, ni securities in
each sector, then the Allocation effect for the ith sector
will still be defined as per Equation (2a). However, the
weights wi and i for the portfolio and benchmark are
the total exposure to the sector in question. In terms of
the sectors constituent securities:
ni
wi w j (3a)
j
ni

common such method is due to Brinson and Fachler [1985], i = j (3b)

j
hereafter referred to as the BF attribution. This model
calculates three attribution effects: Allocation A = Ai ,
Selection S Si and Interaction I = I i (where, again,
The return for the sector to the benchmark is
the weighted average return of the sectors constituent
i = 1,n and n is the number of components).
securities:

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ni
OPTION EXPOSURES
j j
=
j

(3c)
i ni
j
Stannard [1996] outlines two ways to calculate the
j
exposures of single-stock options. The first way is to use
If the Allocation effect did not depend upon the the direct value of the option itself, with no reference to
aggregation, then, with j = 1, , ni securities in the the underlying security. In other words: for Ni options
sector, the aggregated Allocation effect would be equal contracts (in contracts of size 1 share per contract1) and
to the sum of the Allocation effects for each security in pi option price, the direct exposure in a portfolio of
that sector: value V is given by:
ni N i pi
Ai ( j j )(j ) (4)
wi =
V
j
0 1
where Ai is defined in Equation (2a) and the weights For option prices pi at the end of day zero1 and pi
at the end of day one, the return is simply ri = pi0 1 and
pi
and returns are defined in Equations (3). Equation (2a)
becomes: the contribution to return for component i is the product
of the exposure and the return, which is equal to:
ni
ni ni

Ni 1
w j j ni

j j
Ai
j
T i=
CTR ( pi pi0 ) (6)
j j
j
V0
j

ni
ni
= wj
j j j ni ni Stannard argues against using this approach. I will

ni j
j j j j argue below that the direct exposure method may be
appropriate, depending upon how the portfolio manager
j
j j

uses the options.

The last two terms have attained the form of Equa- Stannards second way to calculate exposures for
tion (4) as required. However, it is not true, in general, options is to combine the option position with a cash
that: exposure. This exposure is equal to the options delta i
multiplied by the price of the underlying Si :
ni ni j j ni
i
w j j ni = w j ( ) wi =
Ni Si
j j
j
j
j V

Stannard calls this the full exposure, but I shall

Therefore, the assumption that the Allocation
effect does not depend upon the choice of aggregation
does not hold in general, and so the proposition that
the Allocation effect does depend upon the choice of
aggregation has been proven by contradiction. Similar
arguments hold for the other two BF effects: they will
vary with the choice of aggregation.
I will henceforth incorporate the Interaction into
the Selection effect. However, all arguments below can
be simply modified so as to explicitly include the Inter-
action effect, without changing the substance of the
arguments, if one were to choose to do so. The modified
Selection will be denoted S* and is defined as:
Si wi ( i
call it the delta exposure or delta position. A cor-
responding (virtual) security must be included in the
portfolio in order that the sum of all exposures in the
portfolio is equal to one. This virtual security, called
offsetting cash for the option, is equal to the dif-
ference between the delta exposure and the direct
exposure:
N i ( pi i i )
cash offset = (7)
V
The easiest way to calculate the return is to realize
that the dollar return will be the same as it was for the
direct exposure calculation. Then:
i ) (5)

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 N i ( pi1 pi0 ) Ni (i i pi0 )
ri = wi = (8)
N i i0Si0 V0
pi1 pi0
= The variable l = 1 depending upon whether the
i0Si0 option is a call (positive) or a put2. Note that Ni will be
positive or negative depending upon whether the option
The harder way to calculate the return is to com- is long or short. Since the option is backed by cash, a
pare the delta exposure at the end of day one to the end cash-offset needs to be included in a similar way to the
of day zero. One might be tempted to calculate the delta exposure example.
return based simply upon these two exposures. How- However, in this case, the option value is explic-
ever, this does not take into account what happens to the itly included in the option position rather than in the
cash offset. For example, if the value of delta changes so offsetting cash as it is for the delta exposure. The off-
that less(more) cash is needed to offset the delta expo- setting cash will not change, since it is based on the
sure, then this contributes to the delta position as an strike price, which is a constant. This means that the
income(expense) amount. return calculation is based purely on the option posi-
The third, new, way to calculate exposures is to tion (which includes the gross exposure for the cash).
use the gross exposure. Let us first define four basic The return is:
option strategies:
Xi  i pi1
Long calls: Calls are bought in order to gain expo- ri = 1 (9)
Xi  i pi0
sure to the upside of a stock. Broadly speaking, cash
is turned into stock as the underlying share price X i pi1
rises, and this is a bullish strategy.
Explicitly, the return for a long call is
1 X i pi0
1; for
a short put it is X i pi0 1 .
Naked puts: Puts are sold short in order to receive X i pi
the option premium. Broadly speaking, cash is The bearish strategies are backed by shares, and so
turned into stock as the underlying share price the gross exposure is:
falls, and this is a bullish strategy.
Covered calls: Calls are sold, which cover shares Ni (  i i0 pi0 )
wi = (10)
in the portfolio. Broadly speaking, stock is turned V0
into cash as the share price rises, and this is a bearish
strategy. Rather than using an offsetting cash position, the
Protective puts: Puts are bought, which protect bearish strategies will have an offsetting equity position.
shares in the portfolio. Broadly speaking, stock is The underlying equity position declines by the absolute
turned into cash as the share price falls, and this is value of Ni, and the value of these shares shifts into the
a bearish strategy. option position. The return is:

Other option strategies can be defined as combina- Si1 pi1

ri = i
1 (11)
tions of these. For example, a call option sold short with Si0 i pi
0

no covered shares can be thought of as a combination of

covered calls and short shares. Long puts can be thought
of as protective puts and short shares. Alternatively,
the methods discussed below can be modified so as to
explicitly account for these types of option strategies.
The four basic option strategies can be separated
into two groups, bullish and bearish, for which the gross
exposure is calculated differently. The bullish strategies
are backed by cash, and the gross exposure is defined as:
Consider a covered call that is in the money. If the
underlying equity increases in value, then the intrinsic
value of the (short) call option will increase by the same
amount. Therefore, if there is no change in time value
of the option, the return will be zero. In other words,
the change of the option position in this case is simply
the change in time value of the option.

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 The following four examples illustrate the differ-
ences among the three exposure measures. Consider a
portfolio that begins with $200,000 in cash and 2,000
shares with a value of $105 per share. By the end of day
zero, the portfolio has either bought or sold 10 contracts,
of contract size 100, of call or put options for $8, which
is the price of the option at the end of day zero.
At the end of day one, the underlying increases to
$115 per share. For call options, the value increases to
$18, and the delta increases from 0.4 at the end of day
zero to 0.5 at the end of day one. For put options, the
value decreases to $3, and the delta decreases from 0.5
at the end of day zero to 0.4 at the end of day one. The
four examples consider each of the basic option strate-
gies. In all examples, the portfolio has a beginning value
of $410,000.
The first example is that of a long call, where $100,000
is shifted from the cash component to the option compo-
nent. On day one, the portfolio benefits from the stock
price increasing as well as the option price increasing, such
that the value increases to $440,000a gain of $30,000,
or 7.32%. The stock component has a return of 9.52%,
with an exposure of 51.22%, for a contribution to return
of 4.88%. The option component return depends upon
the choice of exposure. Exhibit 1 details the exposures and
returns for the three different approaches.
The second example is that of a naked put. This
strategy shifts $100,000 from the cash component to
the option component in the same way as the long
call example. On day one, the portfolio benefits from
the stock price increasing as well as the option lia-
bility decreasing, such that the portfolio increases in
EXHIBIT 1
Long Call Example
EXHIBIT 2
Naked Put Example
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JPM-MORGAN.indd 107
value to $435,000, a gain of 6.10%. The stock return
and exposure is the same as in the long call example.
Exhibit 2 details the exposures and returns for the
option component for the three different approaches
for this example.
The third example is that of a covered call. This
strategy shifts 1,000 of the shares out of the stock com-
ponent and into the option component. On day one, the
portfolio benefits from the increase in the stock price, but
this benefit is limited to the uncovered shares, which
achieve a return of 9.52% on an exposure of 25.61%, for
a contribution of 2.44%. As mentioned earlier, since this
option is in-the-money, the gain for the covered shares
is eliminated by a corresponding loss in intrinsic value
for the covering call options.
Exhibit 3 details the exposures and returns for
the option component for this example. This portfolio
increases in value to $420,000 at the end of day one,
which is a gain of 2.44%.
The fourth and final example is that of a protective
put. This strategy also shifts 1,000 of the shares out of
the stock component and into the option component.
On day one, the portfolio benefits from the increase in
value of the shares, but mitigating this gain is a loss in
(time) value of the put option. The stock component,
with an exposure of 25.61%, increases in value by 9.52%,
for a contribution of 2.44%. However, the option com-
ponent, with an exposure of 27.56%, increases in value
by just 4.42%, for a contribution of 1.22%. Overall the
portfolio increases in value to $425,000 at the end of day
one, which is a gain of 3.66%.
EXHIBIT 3
Covered Call Example
EXHIBIT 4
Protective Put Example
THE JOURNAL OF PORTFOLIO M ANAGEMENT 107
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 CHOOSING THE EXPOSURE
The choice of exposure for single-stock options in
the attribution analysis should properly ref lect the invest-
ment style of the portfolio manager. As an example,
the Wingate Asset Management equity strategy uses
exchange-traded single-stock options to enter and exit
long-only large cap equity positions. Instead of buying
the underlying shares, Wingate will sell a naked put
option to gain exposure to that stock. The cash needed
to buy the shares is set aside in the case that the options
are assigned to the fund. In other words, Wingate makes
an allocation decision over the whole of that cash (gross)
exposure.
This is in contradistinction to a portfolio manager
who allocates only the delta-adjusted exposure to that
stock position. This latter type of portfolio has a dynamic
cash-offset figure which changes in step with changes
in delta. It would clearly be more appropriate to use the
delta-adjusted exposure in the attribution analysis for
this type of portfolio.
A third portfolio manager might choose to allocate
only the bare minimum amount of cash to the short
put positionthe collateral required by the managers
clearer or the options exchange. In this case, it would
be most appropriate to substitute delta for the collat-
eral factorthe proportion of the gross exposure that
is required for collateral.
A fourth portfolio manager might trade in options
for which she does not need to post collateral, or only
needs to post a minimal amount of collateral. This port-
folio manager considers the options themselves to be
assets. For this portfolio, a performance analyst should
choose to use the direct exposure method in any per-
formance attribution.
In all four of these cases, the contribution to return
for naked put options over the time period remains unaf-
fected by the choice of exposure. The exposure deci-
sion affects only the exposures and the resulting returns
to the portfolio for each security or component. This
is appropriate, since the proportion of offsetting cash
chosen by the portfolio manager is an allocation decision,
as shall be seen below. The same is true for long calls.
For the bearish strategiesthe covered call and the
protective putthe options are backed by shares rather
than cash, and the contribution to return is impacted
by the choice of exposure in the attribution analysis.
The gross exposure in this case is similar in concept to
108 P ERFORMANCE ATTRIBUTION OF OPTIONS
JPM-MORGAN.indd 108
the direct exposure, except in the latter the underlying
shares are explicitly included in the options category.
One should be aware that performance of the
underlying shares under the direct exposure method will
overstate positive performance and understate negative
performance in the case of a covered call (and the oppo-
site in the case of a protective put) due to the asymmetric
nature of the covering call option. The contribution to
return for the options component considers the option
without reference to the underlying shares, whereas this
is explicitly included in the gross exposure method.
The delta exposure method has the same contri-
bution to return as the direct exposure method, but
the exposure is modified by delta. The contribution to
return should be compared against the contribution to
return of the underlying shares in order not to exag-
gerate the contribution of the underlying shares. If this
is done, then the contribution to return for the options
including the underlying shares will be the same under
the delta exposure method as it will be for the gross
exposure method.
The difference is that the delta exposure method
has an offsetting virtual cash position that increases
as the option goes more in the money. However, in
most cases this cash will not be available for the port-
folio manager to invest elsewhere, and so there will be
an effective overallocation to cash in the attribution
analysis. This problem is minimized in portfolios that
use delta hedging, for example.
Other issues with using the delta exposure
include:
Computational complexity, especially with regard
to calculating a cash-offset amount that changes on
a daily basis
Incomplete historical data records of delta
The change in value of the share price may indeed
be a good approximation for the change in value
of the delta position, but this is only true if the
change in option price (or share price) is small. If
this approximation does not hold, then there is no
advantage in using delta in the first place.
SECURITY ATTRIBUTION
The Selection effect of Equation (5) has two fac-
tors: the weight of the security in the portfolio and the
relative performance of that security compared to the
WINTER 2014
1/17/14 1:46:11 PM
 benchmark. If a portfolio contains a particular secu-
rity but does not trade in the security over the time
frame of the attribution, then the Selection effect at the
security level will be identically zero: the security has
identical performance in the portfolio as it has in the
benchmark.
The corollary to this is: if there is a Selection effect
for a particular security, then there has been trading
done in the security over the attributions time frame. As
such, the Selection effect for a performance attribution
by security (i.e., no aggregation) actually gives a measure
of the trading effectiveness of the portfolio manager.
On the other hand, the Allocation effect of Equa-
tion (2a) has two factors: the active weight of the
security compared to the benchmark, and the relative
performance of that security compared to the bench-
marks return as a whole. This means that the Alloca-
tion effect at the security level is actually a measure of
security selection. The individual Allocation effects can
give some indication of which particular allocations to
securities provided large magnitudes of relative return.
For this reason, it is useful to explicitly include all non-
benchmark securities in the attribution analysis.
The sum of the allocation effects for the portfolio
has only limited usefulness in performance analysis,
since it is simply the portfolios out(under)performance
net of any trading effects.
A near alternative to attribution by individual
security is to aggregate the securities by parent com-
pany. Consider a fund that consists of cash and naked
put options. The performance analyst could use the delta
exposure for this analysis, but this will not reveal much
about the effectiveness of the options strategy, since the
attribution will provide the same results as if the fund
were made up of cash and a delta-adjusted number of
(long) shares in the underlying stock of the put options.
In other words, this analysis is agnostic about whether
the performance was achieved by shares or by options.
That being said, the Selection effect will provide a mea-
sure of trading effectivenesswhich could be useful in
determining the cost of portfolios that employ dynamic
delta hedging, for example.
A fund that uses naked put options or long calls
to gain exposure to a stock could instead use the gross
exposure method. The resulting Allocation effect from
the attribution by parent company indicates how well
the portfolio manager selected stocks. The Selection
effect, on the other hand, is the sum of two things: the
WINTER 2014
JPM-MORGAN.indd 109
portfolio managers trading effectiveness and the effec-
tiveness of the options strategy vis--vis a portfolio that
was simply long in the shares of the underlying stock.
Thus, the attribution analysis explicitly accounts for the
options strategy.
A fund that uses covered calls or protective puts
would have a positive Allocation effect with the gross
exposure method if the stock outperforms the market,
and a negative one if the stock underperforms the
market, thus indicating whether or not the stock was
selected well. Net of any trading effects, the Selection
effect will be positive if the share price decreases (indi-
cating a beneficial options strategy) and negative if the
share price increases (indicating the options strategy
hindered performance).
ASSET TYPE ATTRIBUTION
An asset type attribution for a portfolio containing
shares and options aggregates securities by the following
sectors:
Equities
Puts
Calls
Cash
Note that the delta exposure would effectively
remove the puts and calls asset types, since these would
simply fall into the equities category (with respect to
their respective delta-adjusted exposures). The gross
exposure method is therefore useful in answering the
question of whether or not the options strategy added
value. Note also that the bearish strategies would shift
some of the equities exposure out of the equities cat-
egory and into the calls category under the gross expo-
sure method.
The calculation of the exposure and return num-
bers in the equities sector is trivial. If the benchmark is
an index, then the Allocation effect will be identically
zero, since the return to the benchmark for the equi-
ties sector is the same as the total return of the bench-
mark. The total attribution effect is therefore given by
the Selection effect. This effect simply indicates how
well the portfolios equities performed compared to the
benchmark.
The return calculation for each put option is given
in Equation (9), such that the return for the put sector is
THE JOURNAL OF PORTFOLIO M ANAGEMENT 109
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 the weighted average return of all of the put securities
(weighted by the gross exposure). The exposure and the
return of the puts sector can then be used to calculate
the attribution effects. However, a question still remains:
what is the return i to the benchmark for the puts sector?
This is not well defined, since there are no puts in the
benchmark. There are two obvious possibilities:
The first possibility is to use the return of the puts
sector to the portfolio as the return to the benchmark.
The Selection (and interaction, if one insists) effect is
then identically zero. This leaves only the Allocation
effect, which reduces to:
Ai wi ( i ) (12)
since the puts sector has zero weight in the benchmark.
Note that this looks very similar to a Selection effect.
The only difference is that i in Equation (5), the return
to the benchmark for the sector, has been replaced by ,
the total return of the benchmark.
This Allocation type effect is also the total effect
for the puts sector. It simply indicates the effectiveness
of the portfolio managers put options strategy. Note
that this differs from the Selection effect in the parent
company attribution only in the sense that the latter
assumes the portfolio manager would have otherwise
bought the equities of the underlying stock instead of
selling the puts; the former assumes the portfolio man-
ager would have bought the index rather than the indi-
vidual equities.
The second possibility is to use the total return of
the benchmark as the return of the benchmark in the
puts sector. In this case, the Allocation effect is iden-
tically zero. The Selection effect reduces to the same
form as the Allocation effect in Equation (12), which
is also the total attribution effect for the sector. It is not
easily determined whether this effect has been caused
by allocation or selection, so I propose to name it
the Put effect instead.
The exposure for the calls sector is calculated as
the sum of direct exposures for all the call options in
the portfolio. The return is the weighted average return
of the call options. The Allocation and Selection effects
have the same issues as the put sector. Therefore there is
only one effect, the total attribution effect, which shall
be called the Call effect.
The exposure to the cash sector for the portfolio
is calculated by adding and subtracting all option cash
110 P ERFORMANCE ATTRIBUTION OF OPTIONS
JPM-MORGAN.indd 110
offsets from the cash balance. If there is no currency
effect, then there will also be no Selection effect, and
the resulting Allocation effect will also be the total attri-
bution effectwhich shall be called the Cash effect.
The return to an index benchmark for the cash sector
is defined to be zero. Therefore, assuming the portfolio
is not leveraged, the Cash effect will be positive if the
benchmark is negative over the period, and negative if
the benchmark is positive. This will be reversed if the
portfolio is leveraged (in other words, if it has a negative
cash exposure).
GICS SECTOR ATTRIBUTION
A GICS sector type attribution is a very common
method of attribution, and the process is well known.
The only complexity for a portfolio of equities, options,
and cash is to properly define the exposures and returns
for the separate GICS sectors. The delta exposure
method will yield the same results as if a delta-adjusted
number of shares had been used in the portfolio instead
of the options.
For the gross exposure method, each put and call
option must be allocated to the GICS sector of the
underlying stock. The exposure for long calls and naked
puts is the gross exposure, and the exposure for covered
calls and protective puts is the direct exposure (which
will be the same as the gross exposure in this case).
The return for each sector is the weighted average
return of all securities, where the performance of equity
securities is calculated in the usual manner. The perfor-
mance of bullish options is calculated as per Equation
(9), and the performance of bearish options is calculated
as the direct return of the options themselves.
The Allocation effect indicates the portfolio man-
agers effectiveness in allocating to GICS sectors. The
Selection effect indicates how well the portfolios chosen
stocks performed within the sector, together with the
effectiveness of the options strategy. The trading effec-
tiveness and effectiveness of the options strategy can
be separated by aggregating the securities by asset type
within each GICS sector.
CONCLUSION
One might argue that it would be better to use
the delta exposures when calculating exposures of the
respective components (for example, GICS sectors),
WINTER 2014
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 regardless of what the portfolio manager intended when
entering the option position, since the delta exposure
gives a more accurate picture of the portfolios exposure
to each sector. However, such an attribution would com-
monly overestimate a portfolios allocation to cash.
This is less obvious with naked puts and long calls
than it is for protective puts and covered calls, since with
the latter two types of options there is no actual cash
freed up by an increase in (magnitude of ) delta. Unless
the portfolio is, say, a hedge fund that has the facility to
borrow against this virtual cash, there is no cash that the
portfolio manager can use in other opportunities.
I argue, however, that just as the whole of the
underlying equity position is often used as collateral
for a covered call, so too the whole of the underlying
cash position (the gross exposurethe amount of cash
needed to buy the shares) is often used as the collat-
eral or offsetting cash for a naked put position. In these
cases, it is more appropriate to consider the exposure
to the option position as the gross exposure, since that
is how much of the portfolio has been allocated to the
position.
In any case, a performance analyst can answer
particular questions about the effectiveness of option
strategies by calculating the performance attribution
with appropriate aggregations. To obtain the fullest
picture of a portfolios performance, the analyst should
calculate the BF attribution effects, where the securities
are aggregated by GICS sector (along with any other
aggregation in which the analyst is interested, such as
market capitalization) as well as calculating the BF attri-
bution effects for two aggregations: parent company
and asset type.
The Selection effect from the parent company
aggregation will indicate the effectiveness of the port-
folio managers options strategy (along with the trading
WINTER 2014
JPM-MORGAN.indd 111
effectiveness). The Put effect and the Call effect from
the asset-type aggregation yield important information
about the effectiveness of the portfolio managers options
strategy. And the Cash effect indicates the opportunity
cost or benefit of not being fully invested in the market
(or of being overinvested in the market for a leveraged
portfolio).
ENDNOTES
1
If one desired to explicitly include the option contract
size Ci in these calculations, then substitute Ni for NiCi.
2
It is the sign of i.
REFERENCES
Brinson, G.P., and N. Fachler. Measuring Non-U.S. Equity
Portfolio Performance. The Journal of Portfolio Management,
Vol. 11, No. 4 (1985), pp. 73-76.
Brinson, G.P., L.R. Hood, and G.L. Beebower. Determi-
nants of Portfolio Performance. Financial Analysts Journal,
Vol. 42, No. 4 (1986), pp. 39-44.
Stannard, J.C. Measuring Investment Returns of Portfolios
Containing Futures and Options. The Journal of Performance
Measurement, Vol. 1, No. 1 (1996), pp. 27-33.
To order reprints of this article, please contact Dewey Palmieri
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