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Volatility Risk Premium

The VPF sells options based on our proprietary quantitative models. We focus on ‘expensive’ options where demand for protection is high, resulting in attractive premiums. We can sell both uncovered and covered options. When selling an option, delta hedging is applied by taking long or short positions in the underlying instrument of the option to hedge directional exposure and reduce return volatility. We use ETFs, CFDs, and/or futures for this purpose. During a rebalancing process, written options may be closed by buying the same option or by purchasing a comparable option on the same underlying instrument as determined by the quantitative model.

The premiums received from the sale of put and call options may be fully or partially offset by the amounts that need to be paid out. The goal is to execute an option strategy in such a way that the received premiums exceed the amounts paid out, including any profits or losses from hedging activities.

The volatility risk premium is the difference between implied volatility and realized volatility. When implied volatility is higher than realized volatility, investors demand a higher return for bearing the risk of volatile assets than what has historically been realized. If implied volatility is lower than realized volatility, investors are willing to accept a lower return for holding volatile assets than what has historically been realized.

Within the strategy, there is a choice of three options-based strategies, all of which can be applied to the S&P 500. All strategies share a common basis of shorting options, allowing us to target a predefined premium.

→ Low correlation between the 3 strategies
→ Diversification in approach for each strategy
→ Different term structure in each strategy

40 DTE (days-to-expiry) strangles (or straddles) strategy. This strategy is applied depending on the current volatility in the market. The sold options are hedged by delta hedging with ES futures to closely mimic the profit and loss movements of the options. We work with weekly contracts, so positions are closed at the end of each week.

0 DTE intraday iron condor strategy. This strategy is only applied during the U.S. trading session with positions opened based on a fully rule-based approach. This takes into account the hours before expiration and the current volatility in the market. Each iron condor is managed with a stop loss based on the expected premium gained.

Close 45 DTE strangles strategy. This strategy selects the nearest 45 DTE strangles based on optimal IVR (Implied Volatility Rank) and deltas. Positions are closed when profit reaches 50% of the credit received. In case of loss, positions are rolled over to the next period or adjusted to reduce delta exposure and rebalance the beta exposure of the overall portfolio.