Option Selling Strategy Discussion at CBOE Risk Management Conference

Delphine Leblond-Limpalaer from Societe Generale and Scott Maidel from Russell Investments teamed up to talk about selling options and the potential volatility diversification benefits of doing so.

Scott began by defining volatility saying there are several directions you can go with the definition of volatility.  It could be realized, implied, short term or long term volatility.  He noted that CBOE maintaining volatility index histories has been very useful in considering volatility based strategies.  Scott pointed out that in the past volatility would be managed by diversifying and holding less of a risky asset.  He says Russell Investments sees change the drivers of return sources, change the shape of return distributions, and change the exposure based on risk regime.  He went on to note that a good starting point is using the CBOE S&P 500 BuyWrite Index (BXM), CBOE S&P 500 2% OTM BuyWrite Index (BXY), and CBOE S&P 500 PutWrite Index (PUT) as tools to educate clients on the benefits of option selling strategies is very useful.  He noted that with the increased popularity of SPX Weeklys a dynamic buy-write strategy is possible.

Delphine started out noting that it has been a tough year for option writing strategies.  She noted that the overwriting market in Europe has changed in two ways it is more tactical or opportunistic and a shift from OTC to listed options.  She notes that option writing strategies do consistently lower the volatility of a portfolio.    She mentioned that the risk of an overwriting strategy is usually a rally in the market.  A rally in the underlying is what she calls the ‘tail risk’ of a buy-write strategy.   She discussed using a technical indicator to dictate when it is best to sell call options on a market or individual stock.  Also, she discussed a stock with high short interest may not be idea for a covered call strategy since there is the possibility of a short squeeze.  Delphine was asked about the knowledge level of European investors with respect to option selling, she feels the investment community is well informed and knowledgeable with respect to option selling strategies.