The Collateral Yield Enhancement Strategy (CYES) is an overlay strategy that seeks to deliver incremental returns in addition to the other investments in a portfolio, with low correlation to traditional asset classes, and minimal opportunity cost. It offers transparency, daily liquidity, no lock-up, diversification and the benefits of Section 1256 tax efficiency.
The strategy seeks to benefit from the spread of implied volatility over subsequent realized volatility (the volatility risk premium or VRP) in the S&P 500, which provides a unique source of potential alpha for a portfolio over time. It also seeks to take advantage of the time decay of options over time (a metric called Theta).
Trading iron condors on the S&P 500 may provide a liquid, transparent, tax efficient and directionally agnostic way to potentially benefit from volatility risk premium (VRP) and theta utilizing an active, risk-managed approach.
An iron condor is an option strategy with 4-legs:
Legs 1 and 2 help to generate premium from the sale of the options. In legs 3 and 4, options that are further out of the money (cheaper) are purchased in an attempt to contain any potential risks associated with legs 1 and 2.
Since the income is sourced from the sale of the call and put options, the Collateral Yield Enhancement Strategy (CYES) may offer a unique potential to generate yield that’s sourced from volatility, rather than more traditional sources of yield such as fixed income or equity dividends.
The Collateral Yield Enhancement Strategy (CYES) is an overlay that seeks additional non-correlated yield, which may be timely in the current yield-starved environment.
Partner, Head of Trading
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1Please note that the Adviser calculates its assets under management with respect to its overlay strategies based on notional valuations and mandate sizes rather than market valuations. AUM is as of 12/31/2020.