Defensive Equity

Parametric’s Defensive Equity (DE) strategy seeks to provide equity-like returns with reduced volatility over a full market cycle. Investors access the volatility risk premium (VRP) through collateralized put underwriting and covered call overwriting.

For institutions particularly sensitive to volatility, reducing equity market risk in favor of pursuing the VRP smooths out returns over the long term, providing an alternative to hedge-fund strategies at a lower cost and with greater liquidity and transparency.

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 -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 here: http://www.optionsclearing.com/about/publications/character-risks.jsp.

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A smoother ride

DE’s model-driven approach is designed to remove emotions and guesswork from the investment decision-making process.

We construct a lower-volatility portfolio by reducing equity market beta and systematically selling fully collateralized equity index options to enhance returns. Compared with a fully invested equity portfolio, DE’s combination of reduced equity exposure and the VRP is expected to realize a lower magnitude in drawdowns and a quicker recovery from stress events.
The strategy is expected to deliver the best relative performance in moderately down and sideways markets while trailing in strong rallies. DE is best suited to investors with a heightened sensitivity to equity risk seeking an alternative source of yield.

Portfolio construction

Model beta: 0.5

Intended benefits of Defensive Equity

Systematic process

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DE offers a disciplined and rules-based investment process designed to deliver more predictable, repeatable results without the use of market forecasts or behavioral biases.

Faster recovery

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The defensively structured base portfolio is designed to reduce drawdowns during stress events. Consistent exposure to the VRP aims to deliver faster recovery to prior peak valuation compared with a long-only equity portfolio.

Portfolio diversification

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DE gives investors an alternative return source while potentially delivering favorable risk-adjusted returns without sacrificing liquidity. It may be used as a complement or replacement for hedge funds or low-volatility equity allocations.

How it works

Base portfolio
Options overlay
Systematic implementation

We begin with a 50% allocation to the S&P 500^® and a 50% Treasury bill allocation.

Next we sell put and call options against the base portfolio to capture the VRP and enhance returns.

Options characteristics:

Fully collateralized (no leverage)
Exchange-traded and cash-settled
Out of the money at initiation
One-month or less initial tenor

Our rules-based approach aims to deliver more predictable outcomes, using disciplined rebalancing with no market timing.

Rules-based implementation:

Disciplined rebalancing back to 50-50 blend based on predetermined bands
Laddered options portfolio with options sales occurring multiple times per week

Options overlay

Next we sell put and call options against the base portfolio to capture the VRP and enhance returns.

Options characteristics:

Fully collateralized (no leverage)
Exchange-traded and cash-settled
Out of the money at initiation
One-month or less initial tenor

Systematic implementation

Our rules-based approach aims to deliver more predictable outcomes, using disciplined rebalancing with no market timing.

Rules-based implementation:

Disciplined rebalancing back to 50-50 blend based on predetermined bands
Laddered options portfolio with options sales occurring multiple times per week

Strategy overview

Want to know more about Parametric Defensive Equity?

Download our strategy overview.

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Why choose Parametric?

$439.1B+

Total firm AUM

$17.8B+

VRP solutions AUM

30+

Years of firm experience

As of 6/30/2023

MORE WAYS TO INVEST

Volatility Risk Premium

Parametric's volatility risk premium solutions are strategies that seek to benefit from the VRP, a distinct and diversifying risk premium that options buyers pay to options sellers. We’ve historically observed that this premium can be a persistent source of return, better positioning your clients’ portfolios to weather market volatility over a full market cycle and improve overall performance.

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