Glenmede Secured Options Strategy Snapshot
COMPENSATION FOR VOLATILITY RISK IN SECURED OPTIONS STRATEGY AT RECORD LEVELS
- The Secured Options strategy seeks equity-like returns with less volatility through a full market cycle by selling S&P 500 Index cash-secured puts. To achieve this objective, the strategy has exposure to both equity and volatility risk premia. While the broader markets have repriced risk over the past month, we believe the combined compensation for these two risks is attractive at current levels, driven primarily by the volatility risk premium.
- Unlike the compensation for equity risk, short volatility risk compensation is at unusual levels (chart below).Using S&P 500 Index Price/Earnings (P/E) ratio as a proxy for equity risk compensation, current levels are similar to those in December 2018. Using the CBOE Volatility Index (VIX) as a proxy for volatility risk compensation, current levels are rare — the Great Financial Crisis is the only period with similar risk compensation.
- While getting to extreme VIX levels has been painful with dramatic moves in the S&P 500 Index, the increased volatility priced into the index options has created a rare opportunity for short volatility risk compensation. Given our objective to find the most attractively-priced options for capturing the volatility risk premium, we believe our strategy is uniquely structured to harvest the combination of risk premia.
The views expressed represent the opinions of the GIM portfolio managers as of March 16, 2020 and are not intended as a recommendation of any security, sectoro r product. Past performance is not indicative of future performance. Actual performance may vary from any opinion reported herein. For institutional adviser useonly, not intended to be shared with retail clients.