Capturing the VRP systematically without leverage
Equity index options may be thought of as financial insurance contracts, and investors pay a premium for insurance-like protection against unfavorable outcomes. The size of the VRP is driven by a range of behavioral, structural, and economic factors that may lead to an imbalance between buyers and sellers of index options.
A defensively structured portfolio can capture the VRP by selling fully collateralized options without introducing leverage. Our rules-based solutions favor diversification, accessibility, and transparency.