Pension, Foundation, and Endowment Use of Options Discussion at RMC

The final session on the first day of the CBOE RMC conference was a panel discussion titled Pensions, Foundation and Endowment Use of Options.  The panel consisted of Colin Bebee from Pension Consulting Alliance, Tro Hallajian from Parametric Risk Advisors, and Ryan Bailey formerly of the Meadows Foundation and was moderated by Michael Warsh from CBOE.

Bebee started out the discussion with three questions:  why his firm implements option based strategies, what option based strategies his firm considers, and how does his firm go about getting strategies implemented.  The ‘why’ is to reduce volatility and participate in the continued evolution of portfolio diversification.  The answer to the ‘what’ question is the covered call.  He noted that covered call strategies are easily implemented and explained to clients.   The ‘how’ part includes quantitative work along with an educational process for pension boards.

Hallajian then stepped up and discussed how his firm implements strategies on behalf of clients.  He made two statements about volatility – it eventually reverts to a mean and his firm sees volatility and an opportunity.  Implied volatility is routinely overpriced relative to realized volatility due to supply and demand imbalances.

Bailey finished up with the perspective of the end user of strategies.  He notes that in order to explain strategies he needs to be able to compare option strategies to other asset classes.   An interesting insight was that in order to discuss option strategies with non-financial professionals it is best to avoid option jargon and plainly state the goal of the use of options.  Another great thought was that expectations should be managed going into implementing an option based strategy.