A strategy that
adapts to the market
DPS employs a rules-based, systematic approach that avoids forecasts and market timing but remains responsive to changing market conditions through the use of dynamic strike prices. Strike prices are determined by targeting a likelihood of worthless expiration. Implied volatility drives the determination of strike price, and strike prices move further out of the money in higher-volatility environments. Frequent expirations mitigate risk and allow for the capture of mean reversion in volatility.
Due to economic, behavioral, and structural factors, options buyers are willing to pay a premium to sellers to hedge against the risk of drawdowns and volatility. DPS capitalizes on this tendency for index put options to trade at higher implied volatilities than realized volatility.