Systematic call overwriting has lost its risk premium
The bull case for systematic call overwriting has broken down because massive, price-insensitive institutional flows since 2012 have entirely drained the volatility risk premium (VRP) from short-dated options.
The argument
The guest argued that pension fund allocations and systematic overriding strategies now represent up to 95% of the client flow in one-month S&P options. Consequently, backtesting a systematic short-straddle strategy since 2012 yields negative returns, while simply buying short-dated straddles outright has actually become profitable.
The thesis, stress-tested
✓ What validates it
- ✓One-month S&P 500 implied volatility consistently trading at or below realized volatility over multi-month periods
- ✓Continued underperformance of benchmark call-writing indices relative to the underlying index
▸ Risks discussed
- ▸A sudden, severe market crash could temporarily spike realized volatility and briefly restore the VRP
- ▸Tactical timing of volatility spikes can still yield positive returns, though it is difficult to execute consistently
Hear it yourself
"Ben states that since 2012, the VRP has largely vanished, leaving the returns to owning short dated straddles actually positive since then. For risk managed ETFs, the implications are unfavorable as many of these strategies often reduce beta without providing meaningful downside protection, results that are posted on the QBR website."
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