Volatility Risk Premium

For institutional investors

The volatility risk premium (VRP) is the compensation earned by investors for providing mitigation against unexpected market volatility. Parametric’s VRP solutions are a suite of strategies that seek to capture this unique and diversifying risk premium through the systematic sale of call and put options.

The VRP can be a persistent source of return over time that may allow investors to access attractive risk-adjusted returns and increase overall portfolio diversification.

Investing in an options strategy involves risk. All investments are subject to loss. Learn more.

The effectiveness of the option strategy depends 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 programs 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 judgment 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 or financial advisor prior to contemplating any derivative transactions. The options risk disclosure document can be accessed at the following web address: https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosure-Document.

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Capturing the VRP effectively and consistently

Equity index options may be thought of similarly in concept to financial insurance contracts, and investors pay a premium for risk mitigation against unfavorable outcomes. The size of the VRP is driven by a range of behavioral, structural and economic factors that may lead to an imbalance between buyers and sellers of index options.

A defensively structured portfolio may capture the VRP by selling fully collateralized options without introducing leverage. Our rules-based solutions strive for diversification, accessibility and transparency.

Using different combinations of collateralized equity index put and call option positions, your institution can access VRP strategies across a range of equity market betas.

Which VRP solution is right for you?

INVESTOR SPOTLIGHT

Benchmarking Defensive Equity

An important consideration for any strategy is determining its appropriate benchmark for evaluating performance. Parametric's Defensive Equity (DE) strategy fits squarely within the category of options-selling strategies, also known as volatility risk premium (VRP) strategies, an investment universe where benchmarking considerations are more nuanced.

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Volatility Risk Premium

Benchmarking Defensive Equity

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