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Active Overwrite
Gain equity exposure at reduced risk
Gateway’s Active Overwrite strategy is a low-volatility equity strategy that combines an index-like portfolio of underlying equity securities with actively managed written index call options1. This strategy is a flexible, yet disciplined approach to covered index call option writing with the objective of outperforming the Cboe® S&P 500 BuyWriteSM Index (the BXMSM)2 over the long-term and the potential for better risk-adjusted returns than broad equity market indexes.
The strategy capitalizes on the implied volatility versus realized volatility relationship, and can reduce equity volatility in a robust, repeatable way. Owning a diversified equity portfolio similar to a broad-based index, while also selling index call options, can capture the benefits of equity investing while reducing risk. If the underlying index rises, the strategy can participate in this advance, but generally not beyond the amount of premium received from the sale of call options. If the underlying index falls, call option premium can potentially offset the drop in value of the strategy’s equities. Depending on the magnitude of decline in the underlying index relative to the call premium received, this can result in a smaller loss, or a slight gain, for the strategy relative to the index.
Low-Volatility Equity Profile
The strategy exhibits characteristics of high equity correlation with reduced beta and standard deviation, which can help mitigate losses during down markets while maintaining the potential to capture a majority of the equity market’s return over a full market cycle. The structure of the Active Overwrite strategy gives it increased market exposure in comparison to that of the Flagship Strategy, which also utilizes purchased index put options to hedge portfolios.
Portfolio Application
Active Overwrite is a multi-faceted strategy with the flexibility to support many applications. Within a portfolio, this strategy can act as:
- A core equity strategy
- A complement to plan immunization/liability matching
- A component to an alternative program
1 Selling index call options can reduce the risk of owning stocks, but it limits the opportunity to profit from an increase in the market value of stocks in exchange for up-front cash at the time of selling the call option.
2 The Cboe® S&P 500 BuyWrite Index (the BXMSM) is a passive total return index designed to track the performance of a hypothetical buy-write strategy on the S&P 500® Index. The construction methodology of the BXMSM includes buying an equity portfolio replicating the holdings of the S&P 500® Index and selling a single one-month S&P 500® Index call option with a strike price approximately at-the-money each month on the Friday of the standard index option expiration cycle and holding that position until the next expiration.
