Derivatives Program
- 1. EQUITY DERIVATIVES PROGRAM IMPROVING RISK ADJUSTED RETURNS AND GENERATING INCOME Current problematic macro environment combined with ultra-low interest rates create a hard choice for investors: investment-grade fixed income with more risk than potential benefit on the one hand; and outright long-only equity investments which might be too risky at present on the other. Our program offers a viable alternative, and allows investors to implement a conservative approach to equity investments, target attractive "bond-plus" risk-adjusted returns, and receive significant downside protection APPROACH The approach involves systematically selling "insurance policies" (put options) on stocks of individual companies. The companies are chosen based on fundamental valuation criteria, while more technical factors are used in order to identify cases where option premiums justify taking the risk and selling this "insurance" as opposed to a more widespread idea and approach of buying "insurance" FUNDAMENTAL INSIGHT Fundamental valuation and research is conducted in order to identify attractive investment opportunities. The focus is on strong, profitable companies which trade at value-oriented prices and valuations. Especial emphasis is put on identifying companies with low or conservative debt levels and strong balance sheets, stable cash flow generation, positive industry conditions, and shareholder-friendly management (dividends, stock buy-backs) IMPLEMENTATION • Systematic selling of OTM put options on individual equities • 10-15% OTM • Maturity of 3-12 months • Annualized premium of 7-15% or more • Investment of available cash into short-term deposits and fixed-income for an additional yield KEY BENEFITS • Conservative approach to equity investments • Clear and attractive return objective (8-12% per year) • Lower volatility than of broad equity markets • Significant protection during falling markets (15-30%) • Diversified portfolio