Volatility Risk Premium (VRP) is compensation to an investor for bearing risk related to sudden spikes in market volatility, which tend to coincide with market declines. This risk premium is believed to arise from the behavioral bias known as risk or loss aversion, which suggests that investors are willing to sacrifice a small, but certain amount of return to remove the risk of a larger uncertain loss. We believe strategies that use options to capture the VRP can generate returns with low correlation to traditional assets and expand the benefits of diversification. Our VRP focused suite of products are designed to balance upside and downside exposure. With deep options experience over multiple market cycles, our derivative strategies offer passive exposure to the underlying index through an actively managed option selection process.

While both strategies are economically equivalent and share the same risk-return profile, they are constructed in different ways. A cash-secured put strategy involves selling a put option on a stock and keeping enough cash on hand to purchase the underlying stock if the stock price falls below the strike price and the option is exercised. This strategy is commonly used to earn option premium income and interest on the cash reserves until the stock falls below the strike price. The interest and premium income collected effectively reduce the cost of buying the underlying stock. A covered call strategy involves selling a call option on a stock you already own. This approach is typically used to enhance the current income from your existing stock portfolio by capping your upside potential in exchange for the call option premium. The premium collected includes embedded interest rates, which helps to increase the premium income and lower the cost of owning the underlying stock. Glenmede Investment Management incorporates both of these option strategies as part of its approach to risk management and income generation.