Strategies in Today’s Market: Strategic and Opportunistic Options

The following topics were discussed:

• Hedging concentrated stock positions
• Estate Planning with Opportunistic Yield Enhancement
• Three timely options-based strategies for today’s environment: Defense, Income and Offense

Maisie Hughes has been working with family offices for about 8 years and is now responsible for business development in New England, the Mid-Atlantic and Pacific Northwestern US at SpiderRock Advisors. She opened the conversation by discussing the challenges that come along with taxes when investing: “Smarter portfolios really begin with a focus on risk management, and then option overlays are the most effective and tax efficient way of solving for risk management. Brian mentions that yield options can definitely add a yield component to a portfolio in a tax efficient manner. They can also solve these sticky challenges in wealth management that have historically been hit very hard and are hard to solve.”

Dave Donnelly is a partner of the firm and works with advisors at family offices, looking at their unique challenges as it pertains to their liquid portfolio and coming up with customized solutions by using equity derivatives.

A Look Inside the Webinar

Why Does Strategy Work Well in Today’s Environment?

1. Anything in the hedging realm is accelerating, in terms of interest. Donnelly discussed how they hear this a lot from their clients who own some of these high flying tech names. They want to know how to take some of the risk off the table without selling the stock and paying taxes.
2. Volatility remains very elevated. Thinking back to March of 2020, volatility hit all-time highs, and has remained elevated compared to what it’s been historically.

Single Stock Hedging

Dave discussed a few strategies he’s seeing that work well in today’s environment. He’s had a handful of clients that have made a bunch of money in equities over the past 12 months and are looking to take some risks off the table, without selling their stocks.

“The most well-known options strategy is covered call writing, which is essentially selling the potential upside in the stock you own to someone else. Over 30 years, these strategies tend to return about the same as equities, but it’s done on a third or less volatility. Another strategy is collar payoff, which is similar to covered call writing, but instead the client will buy downside protection so even if the stock goes to zero, the most they will lose, from a portfolio value perspective, is 10% or 11% of whatever the footstrike is.”

3 Strategies for Today’s Environment:

1. Defense Strategy
2. Income Strategy
3. Offensive Strategy

Estate Planning with Opportunistic Yield Enhancement

At SpiderRock, they use an “opportunistic yield enhancement strategy to reduce portfolio equity exposure, while potentially generating additional income. This solves multiple problems:

1. It helps the client reduce their equity exposure without incurring capital gains taxes;
2. It allows the client to potentially generate a new income stream off the portfolio; and
3. By using income from the options or losses created from options, the client can liquidate a percentage of their portfolio and completely offset their capital gains tax bill.

Opportunistic Yield Enhancement toggles between selling individual name options (AAPL options on AAPL stock) and index options. This flexibility allows clients to sell volatility when it looks attractive in individual names and sell index volatility when individual name volatility looks unattractive.”