Gain exposure to the implied volatility risk premium
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 potential for better risk-adjusted returns than
broad equity market indexes.
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, the value of the written index put option increases and 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 portfolio relative to the index.
PutWrite focuses on writing short-term, near-the-money index put options which
generate desirable cash flows and provide meaningful exposure to the implied
volatility risk premium. Typically, the principal price component of the
strategy’s written options is implied volatility. Because implied volatility is
frequently overpriced, writing index put options creates a consistent
opportunity to deliver better risk-adjusted returns than those of the broader
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
Active PutWrite strategy exhibits characteristics of high equity correlation
with reduced standard deviation, which can help mitigate losses during down
markets and allow for participation during market advances on a more consistent
basis. The structure of the Active PutWrite strategy gives it increased equity
market exposure in comparison to that of the Gateway Index/RA 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 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.
Gateway has discretion to reduce put coverage and deviate from these guidelines.