Elevated Beta VRP

Our Elevated Beta VRP strategy seeks to outperform the S&P 500® Index over a full market cycle with less volatility while capturing VRP and offers a beta of 0.75.

Strategy Goals

The Elevated Beta VRP strategy is designed to capitalize on the tendency of implied volatility to exceed subsequent realized volatility.

Traditional approaches typically focus on stock selection and exposure to a select number of factors. Elevated Beta VRP uses a model-driven investment approach that is designed to remove the emotions and guesswork from the investment decision-making process. The strategy creates implicit downside protection through a core position in the S&P 500® and Treasury Bills, and then systematically sells collateralized equity index call and put options to capture the options-based Volatility Risk Premium (VRP). Over a full market cycle, income generated from option sales is expected to more than offset the equity risk premium foregone. 

As one of Parametric’s Volatility Risk Premium (VRP) strategies, it allows investors to harvest the volatility risk premium – a distinct, persistent return stream – through the systematic sale of equity index options without the use of market forecasts. These strategies are designed to increase portfolio diversification at a lower cost than traditional alternative investments, without sacrificing liquidity.

Portfolio Construction

Elevated Beta VRP uses a straightforward, quantitative portfolio construction process that includes four different types of holdings: equity index exposure, Treasury Bills, equity index call options and equity index put options. The portfolio provides protection by selling collateralized index options to generate additional return.

Low Volatility Equity - Portfolio Construction

For illustrative purposes only. Individuals may not invest directly in indexes. Investments subject to loss. Information subject to change.

The effectiveness of the option strategy is dependent 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 program 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 judgments 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 and/or financial advisor prior to contemplating any derivative transactions. The options risk disclosure document can be accessed at the following web address: http://www.optionsclearing.com/about/publications/character-risks.jsp.

Elevated Beta VRP is offered by Parametric Investment & Overlay Strategies.  For additional information please visit the Disclosure page.

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