This has a bad feel to me as Ben Eisen and Aaron Kuriloff report on pensions at the WSJ:
Some pension funds are seeking to profit from others’ fear.
Pension funds in Hawaii and South Carolina are plying an arcane options strategy called cash-secured put writing. In a typical trade, the investor sells a contract, known as a put, to someone who owns stocks and is willing to pay up for protection in case they decline. If, within a certain time, the shares fall below a given price, the investor buys the stocks at that price, or covers their lost value.
The upside for the pension funds, which are writing options on the S&P 500 index, is that they earn regular income. The strategy aims to work like a volatility dampener. If stocks fall, the income the funds have collected on the options contracts should help cushion any hit they take on the puts and their own separate stockholdings. The pension funds set aside some cash-like instruments such as Treasurys for the payouts, so they aren’t caught without money if the market goes against them.
The cost of options tends to rise when investors expect big market swings, so the strategy does best when investors are fearful and paying up for protection against a downturn—and a downturn doesn’t materialize.
But if protection is cheap and the market takes a big fall, the pension fund can end up with losses.
E.J. Smith - Your Survival Guy
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