Banks Offer New Twist on QIS Options After Market Volatility

Banks are offering investors new options strategies designed to limit losses on quantitative investment strategies (QISs) while still allowing participation in market recoveries, according to a report by Risk.net published today. The shift comes after recent market volatility caused whipsaws that challenged traditional loss-capping mechanisms. Traditionally, banks have employed volatility target mechanisms to protect investors in QISs. However, these methods often meant sacrificing the potential to profit from subsequent market rebounds. The new approach utilizes variable strike options, aiming to capture those recoveries after volatility spikes, Risk.net reported. The move reflects a growing demand from investors seeking to manage risk associated with systematic strategies. Hedge funds, in particular, have been turning to options on short volatility QISs to capture volatility premiums while limiting potential downside, as noted in a report by Hedgeweek. BNP Paribas, Citi, and UBS are among the banks launching call options on these strategies. JP Morgan has also been incorporating zero-day-to-expiry (0DTE) options into its quantitative investment strategies, according to a Risk.net report from November 2023. The bank’s intraday momentum strategy now includes same-day expiry options on the S&P 500, with the aim of boosting returns and improving downside protection. This incorporation of 0DTE options represents a further evolution in how banks are approaching risk management within QISs. The strategies are designed to provide a more nuanced approach to loss protection, allowing investors to potentially benefit from market recoveries that might have been missed with traditional methods.