In a recent op-ed for Advisor Voice, Talaria Co-CIO Chad Padowitz outlines how investors’ instinct to treat volatility as something to avoid rather than a potential source of return could mean they are overlooking valuable income opportunities.
At a time when traditional sources of income are changing, Padowitz says investors should look beyond yield alone, with liquidity, transparency and the source of return all important considerations.
“Investors spend enormous energy trying to avoid volatility, when they could be focusing on how to get paid for it,” Padowitz says.
The opportunity lies in the difference between the volatility investors expect in equities and the volatility those equities ultimately experience. This difference, known as the volatility risk premium (VRP), can be accessed through listed equity options markets.
Put options provide investors with protection against falling share prices. The buyer pays a premium for that protection, much like an insurance premium. Historically, the volatility implied in the prices of equity options has tended to exceed the volatility subsequently realised by the underlying shares. Investors willing to provide that protection can seek to capture the difference as an additional source of return.
“People are willing to pay to make uncertainty go away, even when the price of that certainty is high,” Padowitz says.
Read the full article below:
As traditional income options shrink, volatility offers an alternative
Chad is the Co-Chief Investment Officer of Talaria Asset Management. He has more than 25 years’ experience in the financial services industry in the UK, South Africa and Australia.
His experience includes working as an analyst in the treasury department at HSBC Bank in London, in derivative reporting and analysis, and as an equities research analyst at First National Bank in South Africa.
In 1998 Chad co-founded Aurica Financial Services in South Africa, a private client asset management company. In 2001, this was sold to Anglorand and Chad moved to Melbourne where he joined AXA Asia Pacific in 2003 in the role of investment specialist in equities and fixed income.
Chad holds a Bachelor of Commerce from University of the Witwatersrand (South Africa), is a Fellow of the Financial Services Institute of Australasia and is a Chartered Financial Analyst charterholder. Chad co-founded Talaria Asset Management in 2018.
