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RJA has a deep understanding of the structure of the volatility surface. We analyze the surface daily to understand the current opportunity set, and build off of this analysis when making recommendations to clients and during the option overlay construction.
We work closely with the client in the overlay design phase to determine a risk-return profile that will fit their needs considering investment goals, efficiency expectations, current market conditions, risks, and opportunities. Together, we determine a proper time horizon and risk constraints for the Greek profile of the overlay portfolio.
Once an overlay design is chosen, we employ proprietary tools and significant industry experience to structure an option portfolio that targets the desired risk-return profile at a low cost. The overlay portfolio must be practical and tradable, with strict attention paid to position and risk limits.
We employ a bootstrapping methodology to test the overlay strategy for efficiency and to test the option portfolio for robustness across thousands of possible market conditions.
We present the portfolio structure and test results to the client for review. The client can make adjustments to the design and go through another iteration of the overlay design and structuring process, or approve the design and proceed to portfolio implementation.
As a result of our experience with trading OTC and Exchange Traded options, we have built strong relationships with several broker-dealers and strategically source liquidity from a list of client approved counterparties. The portfolio is executed in a fashion that layers on the risk profile smoothly and limits market impact. We offer a full suite of execution services ranging from execution advisement to full execution and collateral management.
We monitor the overlay portfolio daily and update the client on any overlay implications should there be any large market moves. We conduct a monthly performance presentation and conference call to discuss the overlay progress and the current state of the market. The overlay is rebalanced at the end of the time horizon to a new target profile.