CBOE RMC Presentation: “Rebalancing Using Options”

At the 30th Annual CBOE Risk Management Conference (RMC) this week, the topic of “Asset Allocation Rebalancing Using Options” was covered by two expert speakers –

Dr. Christoph Gort, Partner, SIGLO Capital Advisors

Pav Sethi, Chief Investment Officer, CEO, Gladius Investment Group

The speakers covered these topics –

  • A case study on how dynamic rebalancing has been accomplished in practice.
  • “Option-writing generates positive returns as implied volatility is more often than not higher than subsequent realized volatility. We can interpret this as the willingness of option-buyers to pay an insurance premium to option-writers.”
  • “Systematically rebalancing a multi-asset class portfolio generates positive returns if price reversals occur on financial markets, as they did over the last few decades.”
  • “Rebalancing a portfolio using an option-writing approach not only helps to systematize the portfolio rebalancing but also allows investors to enhance returns.”
  • “We exclusively used traditional S&P 500 index options. Weekly, quarterly and LEAPS options were excluded. As a quick reminder, traditional S&P 500 index options are cash settled and of European type, the exercise-settlement amount being calculated based on the exercise settlement value, SET. … In our base case, we used options with a 1-month maturity. ”

“CONCLUSION. Our paper demonstrates that rebalancing using options enables investors to systematize their portfolio rebalancing while at the same time allows them to enhance portfolio returns and return-risk-ratios. The increased performance benefits from two well-known but rarely assembled sources of returns:

• Firstly, rebalancing pays off for a multi-asset class portfolio in a market environment with price reversals as it tends to take profits after gains and buys back after losses.

• Secondly, rebalancing using options can harvest a premium for writing OTM puts and calls that is not exploitable with calendar- or trigger-based approaches.”

During the RMC I did hear some representatives of big pension fund sponsors say that the idea of using options  is intriguing, and I anticipate that we will hear more on this topic in the future.

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Matt Moran

Matt Moran is vice president of business development for Chicago Board Options Exchange (CBOE), where he communicates with pension funds, mutual funds, and financial advisors. He has delivered more than 200 presentations worldwide on the topics of managing volatility and adding income with option-writing strategies. Previously,…