Gain exposure to the implied volatility risk premium
Gateway’s Active Index-PutWrite (Active PutWrite) strategy is a low-volatility equity strategy that secures an actively managed portfolio of written index put options1 with an underlying portfolio of short-term, high quality cash securities. This strategy is a flexible, yet disciplined approach to secured put writing with the objective of outperforming the Cboe® S&P 500 PutWriteSM Index (the PUTSM) 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. Maintaining a cash collateral portfolio to secure written index put options can capture the benefits of equity investing while reducing risk. If the underlying index rises, the premiums received from writing the index put options allow the strategy to participate in the return of the index, but generally not beyond the amount of premium received. If the underlying index falls below the strike price of the index put option, the written index put option generates a loss, which is partially offset by the premium received upfront when the put was written. Depending on the magnitude of decline in the underlying index relative to the put premium earned, this can result in a smaller loss, or slight gain, for the strategy relative to the index.
Gateway’s cash-secured index put writing strategy can be tailored to a client-specific geographic scope. Two key features of index options that facilitate effective risk management are robust liquidity and access to the implied volatility risk premium, i.e. the persistent over-pricing of volatility in option markets. These features are present in option contracts on both domestic and non-U.S. indexes, which allows investors to pursue attractive risk-adjusted returns worldwide through domestic, international and global implementations of cash-secured index put writing strategies.
Low-Volatility Equity Profile
Gateway’s Active PutWrite 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 PutWrite strategy gives it increased equity market exposure in comparison to that of the Flagship Strategy, which also utilizes written index options; but unlike Active PutWrite, the Index/RA strategy includes purchased index put options to enhance downside protection during sudden severe market declines.
Active PutWrite is a multi-faceted strategy with 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 put options can be a lower-risk strategy than owning stocks, but potentially adds volatility and risk of loss to the underlying portfolio of short-term, high quality cash securities.