​Rebalancing Using Options

Rebalancing portfolios—restoring the weights of different asset classes in a portfolio—is very popular, especially among institutional investors. In many cases the strategic asset allocation does not only contain target numbers per asset class but also ranges in the form of upper and lower boundaries. Less attention has been given to the rebalancing process itself as most investors simply wait and watch prices. SIGLO Capital Advisors produced a research paper, in association with the Chicago Board Options Exchange, about how to systematize the rebalancing process while making it more efficient. The magic lies in writing call and put options and the net outperformance relative to buy-and-hold approaches can be up to 50 bps. p.a.