AUM Over 30 Years

Can portfolios be diversified using a liquid, cost-efficient asset class?

 

Challenge

Investors are generally looking for ways to increase returns and reduce risk in their existing equity portfolios. However, there may be road blocks to this approach, including cost, liquidity concerns, complexity, and potential tax consequences. Parametric* advised a consulting firm that was thinking about ways to use options within their equity allocation. Our answer: a relatively underused solution that seeks to harvest the volatility risk premium (VRP).

See an overview of our Volatility Risk Premium solutions

Solution

For the consultant, we began to look at blending short index puts and calls together in a fully collateralized manner and noticed that the returns could compete with index-like results, but with less volatility. By harnessing the VRP, a risk premium that option buyers pay to option sellers to induce them to enter the market, we are able to produce unique risk/return profiles to address a range of investor objectives.

VRP Overview Graphic

For illustrative purposes only

Get more information on VRP

Parametric’s suite of VRP solutions are designed to offer an attractive and potentially untapped source of returns that can provide return enhancement while reducing overall portfolio risk. In addition, some strategies could appeal to investors wanting to reduce equity risk without sacrificing long-term performance potential with a low correlation with more traditional assets, such as equities or fixed income. We manage over $14B in option selling strategies, as of June 30, 2017, and have 30 years of derivative experience.*


Jay Strohmaier

Jay Strohmaier, CFA - Managing Director 

Mr. Strohmaier leads a team of investment professionals responsible for designing, trading and managing institutional portfolios with an emphasis on Defensive Equity and other option related strategies. He has extensive experience with futures and options-based strategies and has been active in the investment industry since 1984. 

 

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Disclosures

The effectiveness of the option strategy is dependent on a general imbalance of natural buyers over natural sellers of index options.  This imbalance could decrease or be eliminated, which could have an adverse effect.  A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived and well-executed options program may be adversely affected by market behavior or unexpected events. Successful options strategies may require the anticipation of future movements in securities prices, interest rates and other economic factors. No assurances can be given that the judgments of Parametric in this respect will be correct. 

Options are not suitable for all investors and carry additional risks. Investors must ensure that they have read and understood the current options risk disclosure document before entering into any options transactions. In addition, investors should consult with a tax, legal and/or financial advisor prior to contemplating any derivative transactions. The options risk disclosure document can be accessed at the following web address: http://www.optionsclearing.com/about/publications/character-risks.jsp.

*Reflects investment advisory services provided by The Clifton Group, which was acquired by Parametric in 2012.

All investments are subject to risks. For additional information about Parametric, please visit Disclosures.

 

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