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.