A Volatility Chart

Risk-Managed Put Selling (RPS)

Our Risk Managed Put Selling (RPS) strategy is an absolute return strategy that captures the volatility risk premium (VRP) through the sale of equity index option put spreads. RPS is expected to generate positive incremental returns when equity markets are up, flat, or moderately down while limiting downside risk to 5%. It is generally implemented as an option overlay.

Strategy Goals

The RPS strategy seeks to capture the VRP embedded in index options. This strategy creates contingent equity exposure through a collateral position combined with short positions in S&P 500® Index put option spreads. RPS is designed to capitalize on the tendency for index put options to trade at implied volatilities that exceed subsequent realized volatility, but limits maximum downside risk during any 28-day period to 5%.  

RPS seeks to harvest the VRP – a historically persistent and significant return stream - through the systematic sale of equity index put spreads without the use of market forecasts. Addition of the strategy can increase portfolio diversification at a lower cost than traditional alternative investments, without sacrificing liquidity. 

Investment Philosophy

We believe that clients can benefit from the VRP. By systematically selling put option spreads over time, and carefully managing risk, our goal is to produce incremental return when equity markets are up, flat, or moderately down, thus adding to returns of the underlying assets in these market environments. To enable our clients to benefit from the VRP, we have created RPS, a systematic, disciplined overlay strategy. As an overlay, it is used in conjunction with underlying portfolio exposure chosen by the client. 

 

Portfolio Investments

 

  • Underlying collateral can be any marginable security
  • Index put option spreads sold against a portion of, or all of, the portfolio
  • The Client would maintain one or more collateral accounts linked to the options account

 

Performance Objectives

 

  • Seeks to increase returns on underlying collateral by 1% - 2% annually
  • Seeks returns that are generally uncorrelated to bond investments
  • Achieve positive returns in all but significant down market environments
  • Limit any 28 consecutive day maximum loss to 5% of the client-specified program size

 

Implementation

 

 

To implement the strategy, we have developed criteria for choosing options which we believe can maximize the likelihood of capturing the Volatility Risk Premium.


Risk-Managed Put Selling is offered by Parametric Investment & Overlay Strategies.  For additional information please visit the Disclosure page.

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