How Options Helped Cboe Vest Buffer Investor Returns During The 2020 Market Crash

Global markets are historically volatile amid the COVID-19 coronavirus. Typically, cash or diversification across multiple asset classes is the go-to strategy during uncertain market environments. However, with advancements in financial products, investors now have access to solutions that help them better mitigate risk and target returns.

In light of recent cross-asset volatility, Karan Sood, CEO and Managing Director, Head of Product Development at Cboe Vest Financial LLC, spoke with Benzinga regarding his firm’s unique risk-management strategies which received the 2020 Refinitiv Lipper Fund Award for protecting investor portfolios.

About Cboe Vest

Cboe Vest brought to market its flagship Buffer Protection Strategy in 2013, helping investors mitigate losses and amplify long-term returns.

Sood, who once worked on equity derivatives at Barclays Capital, was fascinated by the customizability and unique solutions structured products brought to the market, despite minor pitfalls such as liquidity and cost.

“One of the biggest issuers in 2007 of structured notes was Lehman Brothers. Investors who bought those notes lost almost all their money when Lehman went bankrupt, even though they were linked to the S&P 500.”

At Cboe Vest, Sood integrated the principles and unique dynamics of structured products into liquid mutual and exchange-traded funds with no inherent credit risk.

“The ETF versions that we’ve launched in partnership with First Trust are liquid every second the exchange is open. The mutual fund CIT/UIT versions are liquid once a day, and that liquidity is offered at a third party calculated net asset value, which is very transparent.”

Buffered Returns

The Buffer Protection Strategy, in its simplest form, is a Put-Spread Collar, composed of S&P 500 Flex Options contracts.

Vest picks a duration, and then builds an options strategy around existing market exposure, selling a call to offset the cost of an at-the-money put spread.

“We buy a put at-the-money, and then we sell a put 10% out of the money, below the market,” said Sood. “That spread is going to cost a premium, and so we’ll sell a call to offset.”

The product is then packaged and offered as an investable asset which provides investors with capped upside exposure and downside protection.

An example strategy Sood pointed to delivers 10% protection on the downside, with capped upside exposure of 12%.

“With the 10% Buffer Protection Strategy, the first 10% of the downside losses are protected. If the S&P goes down 8%, the strategy seeks to be down flat,” said Sood. “On the upside, you get 1-to-1 participation, up to 12%.”

With this particular investment product, investors with a higher sensitivity to risk give up returns in excess of 12% to protect their portfolio from losses up to 10% on the downside.

New Strategies, More Protection

“The conventional risk management strategy is asset allocation; when other markets go down, other assets go up,” Sood said.

In 2020, the COVID-19 coronavirus, coupled with geopolitical tensions, led equity and certain commodity markets into a nosedive.

“2020 comes along and all these things that you thought were negatively correlated, now suddenly go down together,” said Sood. “So now, your portfolio actually increases in risk as opposed to decreasing risk based on diversification.”

In light of recent market volatility, Cboe Vest will be launching new income and targeted protection strategies to help investors meet their investment objectives for 2020 and beyond.

“We are not just motivated to deliver returns at any cost or you know just eliminating risk. We are looking to bring a level of certainty, to target a certain outcome.”

To learn more about Cboe Vest’s portfolio enhancing strategies, visit cboevest.com.

Photo by mentatdgt from Pexels.