Volatility Risk Premium

For wealth managers

The volatility risk premium (VRP) is the compensation earned by investors for providing mitigation against unexpected market volatility. Parametric’s VRP solutions are a suite of strategies that seek to capture this unique and diversifying risk premium through the systematic sale of call and put options.

The VRP can be a persistent source of return over time that may allow investors to access attractive risk-adjusted returns and increase overall portfolio diversification.

Investing in an options strategy involves risk. All investments are subject to loss. Learn more.

The effectiveness of the option strategy depends 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 programs 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 judgment 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 or financial advisor prior to contemplating any derivative transactions. The options risk disclosure document can be accessed at the following web address: https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosure-Document.

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Capturing the VRP systematically without leverage

Equity index options may be thought of similarly in concept to financial insurance contracts, and investors pay a premium for risk mitigation 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 may capture the VRP by selling fully collateralized options without introducing leverage. Our rules-based solutions strive for diversification, accessibility and transparency.

Which VRP solution is right for your client?

Parametric offers a range of VRP solutions using different combinations of collateralized equity index put and call options, which can be customized to meet your clients’ portfolio objectives.

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Frequently asked questions

How is the underlying portfolio constructed?

Portfolios have a base of equities, US Treasury bills, or a combination of both to create a range of risk-reducing or risk-seeking investment strategies, depending on the investor’s goals.

How do you avoid leverage?

Our strategies focus on risk management in implementation and don’t employ leverage. Instead, all options are fully collateralized.