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Option Strategies

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Institutional Strategy > Equity > Option Strategies

Option Strategies

A family of structurally lower-volatility strategies designed to improve portfolio risk efficiency and to generate income

  • We seek long-term profits by consistently collecting option premiums in a liquid, risk-managed framework.
  • Our collateralized option strategies offer customizable, transparent solutions to monetize equity market volatility and to generate income in a cost-effective manner.
  • Return distributions generated through systematic index option writing can decrease portfolio volatility by emphasizing consistency, multidimensional diversification and downside mitigation.

Overview

Investment Philosophy

Investors ‘Overpay’ for Certainty

  • Option markets charge investors substantial premiums to help portfolios mitigate short-term losses (put options) and to speculate on short-term gains (call options). In our view, the long-term investor who persistently underwrites risk for market hedgers, speculators and arbitrageurs is the investor who generally earns a fair rate of return.

Risk-Efficient Index Exposure

  • Through the monetization of equity volatility, i.e., being explicitly paid for risk, option writing can participate in rising equity markets while realizing less return volatility.
  • Both the ‘math’ (implied volatility and time decay of up-front payments) and investor biases (risk premiums and option skew) can work in an investor’s favor.
  • By consistently collecting option premiums, option writing makes an explicit trade-off which limits up-market participation in exchange for mitigating down-market participation while still potentially earning a reasonable return in flat markets.

ATM Option Pay-Off Diagram (Illustration)

Monthly Return Distributions

Portfolio Diversification

  • Option writing strategies can supplement traditional fixed income and equity portfolios, and improve overall portfolio risk-return profiles.
  • Institutions and investors can utilize option writing strategies as lower-volatility equity investment solutions, a source of diversifying income and/or a supplement to more expensive hedge fund exposures.

Proof of Concept: CBOE Index Analysis

  • Option writing indexes have generated higher long-term returns than bonds while experiencing less volatility than equities.
  • We believe applying appropriate risk management and diversification can further enhance both risk and returns.

Monthly Return Distribution

January 1990 – September 2017

Index Annual Return vs. Risk

January 1990 – September 2017

***Index data sourced from Bloomberg LP and is gross of fees unless stated otherwise. Selected time period reflects longest common history of indexes. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. The CBOE S&P 500 PutWrite (PUT) Index incepted in June 2007 with historical back-tested data available since 6/30/1986. The use of tools cannot guarantee performance. Unless otherwise indicated, returns shown reflect reinvestment of dividends and distributions. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

  • As illustrated by the CBOE S&P 500 PutWrite Index, put writing has produced competitive long-term returns relative to stock and bond indexes but with greater risk efficiency.

CBOE S&P 500 Option Writing Indexes have Long-Term Verifiable Performance Records

Jun 1986 – Sep 2017
 CBOE S&P 500 PutWrite IndexS&P 500 Index
Total Return (annual) 10.08% 10.14%
Volatility (annual) 9.93% 14.94%
Risk-Adjusted Ret. 1.01 0.68
Beta vs. S&P 500 0.55 1.00
Worst DD -32.7% -50.9%
Up-Market Cap. 62% 100%
Down-Market Cap 39% 100%

**Index data sourced from Bloomberg LP and is gross of fees unless stated otherwise. Selected time period reflects longest common history of indexes. This material is intended as a broad overview of the Portfolio Managers’ style, philosophy and process and is subject to change without notice. The CBOE S&P 500 PutWrite (PUT) Index incepted in June 2007 with historical back-tested data available since 6/30/1986. Unless otherwise indicated, returns shown reflect reinvestment of dividends and distributions. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

Investment Approach

A Fully Collateralized Strategy that Systematically Collects Option Premiums

  • Assets are invested in two distinct investment portfolios:
    • A collateral portfolio that invests in a diversified portfolio of high-quality short-to-intermediate fixed income securities.
    • An option portfolio that systematically writes (sells) exchange-traded options.

Risk Management

  • Proprietary risk management further enhances the strategy.
  • Relative to underlying equity indexes, our option writing strategies are designed to help generate more consistent returns and minimize basis risk, downside and reversal risks while enhancing capital efficiency in flat or bull markets.

Strategy

  • Index PutWrite
    • Lower-volatility equity exposure with higher risk efficiency.
    • Sells fully collateralized short-dated put options on a variety of indexes, e.g., S&P 500, Emerging Markets, EAFE and Global.
  • Index Strangles
    • Diminished equity market sensitivity with an absolute return focus.
    • Implements call option writing in conjunction with a put writing strategy to earn additional option premiums, resulting in lower correlation to equity markets.

Management

Derek Devens, CFA
Senior Portfolio Manager
23 Years of industry experience
4 Years with Neuberger Berman
Eric Zhou
Associate Portfolio Manager
8 Years of industry experience
4 Years with Neuberger Berman
Rory Ewing
Associate Portfolio Manager
17 Years of industry experience
4 Years with Neuberger Berman