Our enhanced equity strategies employ an actively managed covered call approach that seeks to reduce risk and increase the returns of an equity allocation. The strategies seek to generate alpha through the systematic sale of equity index or ETF options. The strategies employ a quantitative, rules-based portfolio construction process with qualitative inputs. These rules provide the portfolio management team with flexibility around option strikes, execution time, and allocations to underlying holdings.
Capitalizing on Volatility Risk Premiums
Equity index implied volatility (as measured by the CBOE VIX Index) has historically traded at a large premium to the subsequent realized volatility of the underlying stocks. This market inefficiency, known as the volatility risk premium, is sustained by ingrained behavioral biases, such as aversion to loss, which cause investors to consistently overpay for ETF and index options to hedge their portfolios. Volatility risk premiums exist across the market for index and ETF options and vary month-to-month as market conditions change.
We believe that an actively managed, dynamic approach to covered call investing is the most effective way to capture the volatility risk premium over time, reduce risk and increase the returns of an equity allocation. Each month, we seek to identify the most attractive volatility risk premiums among ETF and index options, targeting:
- At-the-money strike prices for ETF and index options with attractive volatility risk premiums
- Out-of-the-money strike prices for ETF and index options with less attractive volatility risk premiums