Volos Presents “A Taxonomy of Options Overlays” at EQD 2021
Dan Corcoran, CEO at Volos, told attendees on day one at Global EQD about how he expects the world of options to evolve and how Volos is helping investors use the strategies.
[0:10] Options are on the cusp of a transformational shift. There are now roughly USD24 trillion in assets tied to a major equity benchmark. “At Volos, we think that what benchmarking did to the world of equities, will happen in the world of options and derivative strategies in the near-term.”
[1:00] Institutional investors use options as a hedge, as a way to reduce risk. Many investors right now are worried about downside protection from inflation and tax-change risks. Collars and protective puts are great strategies for protecting downside, as well as tactical tail hedging and long volatility positions. Options are also used as a source of income generation strategies. This can range from simple call overwriting to put selling.
[2:30] Some of these strategies can get quite complicated, ranging from relative-value vol trading to event-driven options strategies. More and more of them are becoming systematized. Another major bucket for options strategies is vol risk premia.
[4:00] In January Volos launched an ETF overlay index family, which tracks 120 core option overlay benchmarks. It covers eight primary asset classes; U.S. large cap, small caps, developed and emerging market equities, credit, U.S. treasuries and gold. They track the most popular option overlay strategies and vary by in- and out-of-the-money strike variations.
[5:30] For example, with rates at all-time lows and equity valuations at all-time highs, stock/bond correlation is a major risk at the forefront of a lot of investors’ list of concerns. Many investors approach managing these risks by tactical shifts into alternative risk premia, momentum or trend following. In this case by buying 5% out-of-the-money puts and selling 5% out-of-the-money calls at a one-month expiry, investors can put an explicit floor on the downside risks, over a period of time. “In this example we consider a fixed weight, monthly rebalanced allocation to the previously mentioned global ETFs.”
[9:10] Many absolute return strategies can be capacity constrained, and often involve finding statistical discrepancies in volatility. Volos designed a benchmark for clients that provides an exposure to equities and U.S. treasuries, but with enhanced yield for downside protection, and an optimized selection of option strike price parameters. “In the benchmark, we’re using a one-by-four-by-three put butterfly across four consecutive weekly maturities and selecting strikes to maximize expected profit.” When times are volatile the strikes of the butterfly narrow, reducing risk, while in risk-on environments the strikes are selected to offer greater potential gains.
[13:20] Separately, Volos has partnered with the Nasdaq-100 on modelling volatility dispersion. The strategy essentially buys options on the single names within the Nasdaq-100 and sells options on the index itself.
