Profiting with Synthetic Annuities: Option Strategies to Increase Yield and Control Portfolio Risk

10. Synthetic Annuities for the Volatility Market

This chapter looks at how a synthetic annuity framework can be applied to the volatility market. Being able to structure volatility positions as long-term components of a portfolio adds a powerful tool in fund management. A number of strategists have even argued that volatility—specifically, selling volatility—should be considered an asset class on its own merits, similar to equities and fixed income. But regardless of whether volatility is an actual asset class, it is interesting because it is strongly negatively correlated to equities and it is capable of producing high levels of risk-adjusted return.

These features of volatility add another dimension to risk management at the portfolio level ...