Discussion of Risk Premia and Volatility Selling Strategies

Can volatility-selling strategies deliver superior risk-adjusted returns over the long term, particularly in light of the fact that index options generally have been richly priced? On Friday at the CBOE Risk Management Conference (RMC), presentations on Risk Premia and Volatility Selling Strategies were delivered by Donald Pierce, CFA, Chief Investment Officer, San Bernardino County Employees’ Retirement Association, and Defina Maluki, Portfolio Manager, Barclays Wealth and Investment Management.


In order to introduce the topic of volatility selling, I note that on Wednesday at RMC, Keith Black of CAIA delivered a presentation that stated — over a 26 ½ year time period, the CBOE S&P 500 2% BuyWrite Index (BXY) and CBOE S&P 500 PutWrite Index (PUT) both had higher returns, higher Sharpe Ratios, and lower standard deviations than the S&P 500® and S&P GSCI indexes.Ch-2015-03-06-0930-Annualized Returns11 Ch-2015-03-06-0930-Annualized Standard Deviation22


In their presentations, Mr. Pierce and Mr. Maluki covered these topics —

  • Theory versus reality in implementing systematic volatility selling strategies
  • Managing gap risks
  • How risk premia strategies fit in the context of macro level fund management


The San Bernardino County Employees’ Retirement Association (SBCERA) has about $8 billion in AUM and has NEPC as a consultant. SBCERA has made substantial changes to the portfolio over the years. One major initiative is exploring volatility – buying and selling puts, and changing equity exposure for a more interesting. We want to manage volatility of downside moves. We have been running an overlay program since 2006.


Mr. Maluki showed a presentation with 31 slides and covered a number of topics —

Instruments that seek to capture the volatility risk premium include short calls, short puts, short straddles, short strangles, and short variance swaps.

Options have notoriously asymmetric payoffs that can challenge investment portfolios.

The volatility risk premium exists for a number of reasons including:

  • Compensation for bearing systematic risk
  • Structural supply/demand imbalances
  • Biased forecasts of financial outcomes made by irrational investors

Systematic/rules-based strategies that seek to capture the volatility risk premium have attractive risk/reward profiles and low correlations relative to other asset classes

Risk management is key to managing a portfolio of derivatives with non-linear payoffs.

Other opportunities exist in the skew and term-structure of volatility.

Trading option spreads can limit exposure to large, sudden declines in the underlying.

Gap risk cannot be eliminated by delta hedging.

Similarly, caps on variance swaps may achieve the same purpose.

Hedging is costly, though it pays off during significant declines in the underlying security.

Over the last 2 recessions, the S&P 500 had maximum drawdowns exceeding 50%.


Defina Maluki is responsible for overseeing research, portfolio management and trading of volatility and options-based strategies in the Wealth and Investment Management division of Barclays. Mr. Maluki joined Barclays in 2012. Previously, he worked at Credit Suisse as a portfolio manager where he led a team that developed and managed absolute return volatility strategies as well as options-based hedging strategies for institutional and high net worth clients. Prior to his role at Credit Suisse, Mr. Maluki worked at Goldman Sachs where he developed fixed income trading and hedging models for a quantitative-macro hedge fund. Mr. Maluki is a CFA charter holder. He holds an MBA from the University of Chicago and a BS with high honors in Electrical Engineering from the Illinois Institute of Technology.

Mr. Pierce serves as the Chief Investment Officer for the San Bernardino County Employees’ Retirement Association (SBCERA) where he has been part of the investment team since 2001. He is responsible for the day-to-day operation of the investment division for the $7.2 billion public pension fund. He works directly with the Board on developing policy and investment goals, implementing investment objectives and the selection of investment managers.  During his tenure with SBCERA, Mr. Pierce introduced international private equity, emerging market debt, and option strategies into the plan’s mix. Additionally, he developed a UAAL forecasting model and he has spearheaded a new rebalancing methodology for the fund. Mr. Pierce earned a Bachelors of Science in Statistics from San Diego State and is a CFA charter holder. He is a member of the CFA Institute and has shared his professional expertise with various professional organizations.

– The essence of VXX: a volatility trade for short time horizons, a term structure trade for longer horizons

– The VXX’s path dependence

– Economic differences between VIX and VXX option strategies

– Divergences between realized and implied volatility strategies

– Sizing & managing short volatility trades: managing risk versus premium outlay

– Impact of volatility ETPs on the volatility market

David Burchmore, Portfolio Manager, Ontario Teachers’ Pension Plan

Rocky Fishman, CFA, Equity Derivatives Strategy, Deutsche Bank Securities Inc.


David Burchmore is a Portfolio Manager of Equity & Derivative Products within the Tactical Asset Allocation and Natural Resources (TAA&NR) Department at Ontario Teachers’ Pension Plan (OTPP).  David has worked at OTPP since 2000, and focuses on alpha-driven derivative strategies involving VIX, variance, correlation and dividends. David has a Bachelor’s degree in Commerce from Queen’s University in Kingston and is a CFA charterholder.

Rocky Fishman is an equity derivatives strategist with Deutsche Bank in New York, where he focuses primarily on VIX and US index options and volatility.  Rocky joined Deutsche Bank in 2009.  Rocky has also worked at Platinum Grove Asset Management and Goldman Sachs Asset Management in various roles in equities, rates, and credit.  A CFA Charterholder, Rocky has Bachelor’s and Master’s degrees in Computer Science from Harvard University and an MBA from Columbia Business School.