VRP

Defensive Equity

The Parametric Defensive Equity (DE) Strategy offers liquid access to an alternative risk premia that is uncorrelated with traditional asset classes while helping diversify overall portfolio risk. It seeks to structurally reduce equity market risk, while adding a relatively uncorrelated risk premium to enhance returns. It is expected that the tradeoff between equity market risk, which the DE seeks to structurally reduce, and the volatility risk premium (VRP) seek to provide a smoother ride over the long term and more predictable outcomes. In addition, the DE seeks to reduce the magnitude of drawdowns and to recover faster from stress events.


Upside Potential

  


Downside Protection

 

 

  

Uncorrelated Returns

Insurance for Your Portfolio

DE harnesses the VRP, a risk premium that option buyers pay to option sellers to induce them to enter the market, similar to the cost (or premium) associated with buying insurance. When constructed correctly, the VRP can help reduce long-term risk and may increase expected return if historical options pricing patterns persist in the future.

Volatility Chart

Source: Parametric. Date: 04/04/17.
11990 to the present represents the longest period from which reliable data is available for the S&P 500 Index implied volatility. S&P 500 Index options relative valuation measured by taking daily observations of implied volatility (as measured by VIX Index) and subtracting the subsequent realized volatility of the S&P 500 over the following 30 days. Options have historically traded about 4.3 volatility points above subsequent realized volatility. Said another way, the option market tends to overestimate future volatility, which translates directly into higher prices for both puts and calls. VIX is the Chicago Board Options Exchange Volatility Index. VIX is calculated constantly throughout each trading day by observing the implied volatility derived from actual market prices of a wide array of put and call options with an average maturity of 30 days to expiration. For informational purposes only.

Portfolio Construction

 

DE construction graphic

For informational and illustrative purposes only. Not an offer to buy or sell securities. Past performance not indicative of future results. Not able to invest directly into indexes. Investing in an options strategy involves risks. One or more combinations of the following risks may be incurred: trade restrictions risk, liquidity risk, early termination risk, option collateral risk, and opportunity risk. See disclosure pages https://parametricportfolio.com/risk-disclosure for additional information. All investments are subject to loss. For use with Investment Professionals and Accredited Investors Only. Not for use with the public.

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What is the Volatility Risk Premium?

Parametric’s volatility risk premium (VRP) solutions aim to provide a significant and persistent source of return without the use of leverage or market forecasts. Rather, they are designed to harvest the diversifying VRP – a well-researched phenomenon based on the discrepancy between the implied and realized volatility of equity index options. Parametric has developed a series of sophisticated VRP strategies to meet investors’ different risk/return objectives.


VRP Beta Chart

For informational and illustrative purposes only. Investing in an options strategy involves risks. One or more combinations of the following risks may be incurred: trade restrictions risk, Liquidity Risk, early termination risk, option collateral risk, and opportunity risk. See disclosure pages https://parametricportfolio.com/risk-disclosure for additional information. All investments are subject to loss. For use with Investment Professionals and Accredited Investors Only. Not for use with the public.

 

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