Option based Equity Downside Protection
- 29 July 2024 (7 min read)
KEY POINTS
Equity Downside Protection Overlay strategies are designed to mitigate risks in volatile financial markets. They aim to shield investors against market corrections, providing a robust defense mechanism. These strategies involve various combination of options tailored
to suit specific risk management objectives as well as evolving market conditions. Each strategy has its own advantages and risks, contributing to a diverse range of behaviours in different market conditions.
When implementing Equity Downside Protection Overlay strategies, careful selection of derivative combinations is crucial. Factors such as moneyness (strike selection) and maturity of the options selected play a critical role in reducing costs and ensuring effective risk management. Additionally, analyzing volatility term structure and skew patterns is essential to determine the most suitable strategy and optimize strike selection. The implementation considerations are also very important. As an example, staggering strategies, which involve purchasing options at different dates to benefit from varying entry levels and expiration dates, can help smooth out costs, reduce price fluctuations, and minimize exposure to short-term market fluctuations. All the strategies are very sensitives to the parameters, and a careful risk-return analysis based on four outputs (Performance, Volatility, Return/Volatility, Max Drawdown) is generally necessary to confirm the selection
Therefore, while the primary objective of the strategies remains to provide some relief during market downturns, the sensitivity of the results in terms of performance and maximum drawdown to the chosen option parameters is critical. It means the design (including calibration but also implementation) of a specific protection option strategy in a given market scenario should be overseen by experts who have a deep understanding of overlay dynamics.
AXA IM's approach to managing Derivatives Overlay Strategies stands out due to its carefully balanced blend of quantitative analysis, backed by powerful proprietary modelling and back testing tools, risk management expertise, and client-centric focus. The team offers a range of tailored strategies and a dedicated team of experts to manage and design overlay strategies.
Derivatives Overlay
Overlay strategies are investment techniques used to manage specific risks or enhance the performance or risk return profile of an existing investment portfolio.
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Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient.
This material does not contain sufficient information to support an investment decision. Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ