Selling volatility

Goldman's Take On Enhancing Returns In A Yield Deprived World

Goldman's Take On Enhancing Returns In A Yield Deprived World

Traders and asset managers across the world have found themselves in a market deprived of yield. We have our central bankers and their policies of zero or negative interest rates to thank.

The quest to find every marginal basis point of return has led the smartest minds to venture where few dare to. There has perhaps never been a time with this abundance of money being left clueless on where next to pour into for that extra basis point of alpha. This scares us.

There are various ways in which zero-yielding cash tries to gain alpha. One such way, and one which we feel has been one of the best and most consistent strategies to enhance returns, is to sell short-term volatility (vol) on U.S. equities.

This often misunderstood and underrated strategy has generated an impressive overall return through the last decade. The consistency of this strategy is what attracts us, along with its relative simplicity both in theory and practice.