We designed our Defensive Equity strategy with four main components:
- Short one-month, out-of-the-money put index options
- Short one-month, out-of-the-money call index options
- Long S&P 500® Index equity portfolio created using exchange traded funds (ETFs) (fully collateralizes the short calls)
- U.S. Treasury bills (fully collateralizes the short puts)
First, we compared the Defensive Equity strategy to the S&P 500 Index. We found that:
- The Defensive Equity strategy can be a direct S&P 500 Index replacement and can be expected to perform similarly in a broadly diversified portfolio over the long term.
- The strategy seeks to deliver long-term results above those of the S&P 500 Index with roughly half the volatility.
- The Defensive Equity strategy may produce an excess of 95% correlation to the S&P 500 Index while seeking to reduce the maximum drawdown by 50%.