⚠ Important Risk Warning
This software and any associated strategy is provided solely for educational and research purposes. It is not intended to provide investment advice, and no investment recommendations are made herein. The developers are not financial advisors and accept no responsibility for any financial decisions or losses resulting from the use of this software. Always consult a professional financial advisor before making any investment decisions. Options trading involves significant risk of loss and is not suitable for all investors.
01 Strategy Overview
The Options & Derivatives Fund exploits a well-documented market inefficiency: implied volatility (IV) systematically overstates subsequently realised volatility (RV) — a phenomenon known as the variance risk premium. By systematically selling options when IV/RV ratios are elevated and term structure is in contango, the strategy collects volatility risk premium from investors who pay above-fair-value for options as downside insurance.
The entry criteria are derived from a quantitative screening model that evaluates three signals simultaneously: (1) IV₃₀/RV₃₀ ratio ≥ 1.25 using Yang-Zhang volatility estimator, (2) term structure slope from front month to 45 DTE ≤ −0.00406 (contango / forward IV below spot IV), and (3) average 30-day option volume ≥ 1.5M contracts. Only trades meeting all three criteria are classified as "Recommended".
02 Entry Signal Framework
| Signal | Threshold | Rationale | Status |
|---|---|---|---|
| Average Volume 30-day trailing option volume |
≥ 1,500,000 contracts/day |
Ensures adequate liquidity for entry/exit with tight bid-ask spreads | PASS |
| IV₃₀ / RV₃₀ Yang-Zhang 30-day vol ratio |
≥ 1.25 | Confirms IV premium over realised — the structural edge of short vol | PASS |
| Term Structure Slope Front to 45 DTE slope |
≤ −0.00406 | Elevated near-term IV (earnings) decays faster than longer-dated — maximises theta capture | PASS |
| Expected Move ATM straddle / underlying |
Informational | Market-implied ±move for earnings; sizes position relative to expected range | INFO |
03 Execution Framework
04 Simulated P&L
05 Strategy Allocation
06 Sample Universe — Screened Candidates
| Ticker | Name | Avg Volume | IV/RV | Signal |
|---|
07 Macro Positioning & Investment Thesis
A short-volatility strategy must be run differently when geopolitical tail risk is elevated. The Strait of Hormuz crisis is exactly the kind of fat-tailed, headline-driven environment that punishes naive premium-selling — so the fund's discipline shifts toward defined-risk structures, smaller sizing, and harvesting a richer premium, rather than reaching for yield by selling unprotected options.
The Premium Why the edge persists
The strategy monetises the persistent gap between implied and realised volatility — the variance risk premium documented by Carr & Wu (2009). Investors structurally overpay for protection, and selling that insurance has positive expected value over time. Crucially, in a higher-fear regime that premium is wider: elevated implied volatility means each option sold collects more, improving the risk-reward of every position the fund initiates.
The Discipline Defined risk in a fat-tailed market
The danger of short volatility is the rare, violent move — and a market exposed to a single chokepoint and live conflict has more of them. The fund manages this explicitly: favouring capped-risk iron condors over naked straddles when geopolitical risk is high, reducing position size during periods of headline risk (an oil-price gap can move the whole market overnight), and respecting hard exit rules. The Yang-Zhang (2000) estimator is used to gauge true realised volatility so the fund only sells when the implied premium genuinely compensates for the risk being underwritten.
Diversification A return stream uncorrelated to the rest
For the broader platform, the value of this sleeve is that its return profile is largely independent of the directional equity, credit and commodity bets elsewhere. Income from volatility decay does not depend on markets going up — only on them not moving more than the option market feared. In a year where the macro path is unusually uncertain, an uncorrelated, defined-risk income stream is a genuine portfolio diversifier.