ALPHA, first letter of the Greek alphabet and used as the symbol 1 in the Greek number system. It has also been used in chemistry, engineering, physics and mathematics. However, in recent years, Alpha has been gaining ground in investment portfolios.
To determine the Alpha of a portfoliowe must go back to the equation created by Sharpe called CAPM(Capital Asset Pricing Model) o Asset pricing modelwhose formula is as follows:
Ke = expected return on our investment
Rf = risk-free return (or Alpha)
B = beta
Rm – Rf = market risk
According to this, the return on our investment is the product of two risks, systematic and unsystematic.
Differences between systematic and unsystematic risk
The systematic risk is represented by the Betathat measures the variability that an asset in question may have compared to its reference market. A Beta greater than 1 means that the volatility of the asset in question is greater than that of its reference index (both for gains and losses).
The Alpha would be the non-systematic risk, that is, it shows the part of the return of an investment that is independent of the market risk and that is attributed to the management carried out. Adding Alpha to our portfolio means outperforming the market without adding risk to it, simply by managing its assets.
The Buywrite Strategy
An example of strategywhich can add Alpha to our portfolios, is known as BUYWRITE. This is based on the combination of purchase of an asset with sale of a call option at a higher price. To do this, we will use an E-mini Nasdaq-100 Future (maturity June 2022) and a CALL option on this same asset with the expiration closest to this Micro Future.
We chose as the underlying asset for the purchase the E-mini S&P Jun22 Future due June 16. Price 3772.25 points.
To complete our strategy, we choose to sell the option that is closest to the expiration of the future and with a higher price. In this case it would be the CALL E-Mini S&P 500 week 3 (wed) Call Jun 22 strike 3800.
In this way we have two sources of income. Both for the premium obtained with the sale of the CALL and for the benefits obtained if our assets rise. All this without adding additional risk to our portfolio.
What advantages does this strategy offer us?
- The premium earned brings balance to our portfolio before closing the products we have in it.
- With the premium income we can also cover the possible fall of the assetthe micro Future of the purchased SP.
- this strategy can be kept recurring in the different maturities of the Future.
What would be the drawbacks?
- We limit our profit to a specific range. In this strategy from 3772 to 3800 points.
These types of Alpha generating strategies can be carried out from an online trading platform, where detailed information about these products can be obtained. This strategy should not be considered in any case a purchase recommendation.
The comments made in this article, the possible operations suggested or proposed and the material provided are for educational purposes only. In no case do they constitute professional advice, an investment proposal or an operational recommendation. iBroker Global Markets Sociedad de Valores, SA is not responsible for the consequences of the information disseminated nor can it guarantee that the information is accurate and/or complete.
Futures and Options are complex instruments and come with a high risk of losing money rapidly due to leverage. Futures and Options do not have negative balance protection and losses could exceed the balance deposited in your account.
Each investor must assess the risks of financial instruments, as well as their knowledge of the functioning of the markets before carrying out operations with complex products. This article can be considered an advertising piece for ibroker.es. You can consult more information about the product in the KID available on the web ibroker.es