The current bull market is a boon for investors, but advisors are understandably wary. Up almost 280 percent since hitting its March 2009 low, record high after record high too often signals a downturn to come. It could be debated that valuations are stretched, and hence they rightly wonder, what will it mean for portfolio allocations?

Getting compositions back in line with original mandates and risk tolerances after drifting in the market mania is a delicate rebalancing dance for advisors and clients who want to avoid capital-gain triggers and their associated tax liabilities.

Yet because of the possible tax liability from selling and repositioning assets, advisors—and their clients—are often reluctant to do much about it, resulting in the potential for far more damage and loss in the long run. Experiencing a significant hit to the portfolio early in retirement, widely known as sequence-of-return risk, is especially troubling, and something from which many investors struggle to (or never) recover.

Luckily, a number of rebalancing strategies exist that, if executed correctly, avoid the tax hit, and range from relatively basic to a bit more complex.

Tax-loss harvesting is one of the better known, and involves the reporting of investment losses as a way to offset the tax liability attached to capital gains. The losses can be taken, or “harvested,” now or in the future, as anything unreported can be brought forward into subsequent years, and a tax reduction of up to $3,000 annually can be applied until the losses are expended.

A second strategy is the donation of appreciated shares to a (qualified) charitable organization. A win-win for both the client and the charity, the donation is deductible for the former, while the latter receives a break on the capital gains when it chooses to sell.

A third technique is to incorporate a type of portfolio insurance “overlay.” Time-tested and in play for decades, it’s a strategy that’s especially relevant given current conditions, and incorporates the use of an options strategy that sells calls and/or buys puts.

It’s a bit more sophisticated, and therefore requires more explanation, yet it’s fast becoming part of many advisors’ toolkits. It can often provide a consistent means to achieve higher risk-adjusted returns, enhanced yields, and lower portfolio volatility. An option overlay utilizes a four-step process by:

1) Reducing the amount of risk, or beta, to bring the portfolio back in line with investor comfort levels;

2) Calculating the difference between current and optimal target exposures to protect against downside loss;

3) Selling call options (or purchase puts) on the S&P 500 in the appropriate amount to rebalance the portfolio; and

4) Managing the option component in the existing account, monitoring positions in real time and adjusting them as markets move.

And here’s why it’s important.

Over the past several years, equity market performance has exceeded fixed income by so much that a client whose portfolio was initially weighted in the standard 60/40 equity-to-bond ratio might be closer to a 75/25 risk profile.

Additionally, the equity holdings of a particular client might have a low cost-basis, and selling a portion of their holdings to bring the portfolio back into line with its mandate would generate the aforementioned substantial capital gains and the associated tax liabilities.

In their search for a tax-efficient solution, advisors can apply the options overlay to reduce portfolio beta to the target weighting without triggering a taxable event, while also buffering the portfolio’s downside exposure and potentially generating a new stream of income from call premium. It involves structuring a precise number of options transactions around the client’s existing portfolio holdings.

For example, a client with a $1 million portfolio would like to reduce their equity exposure by $150,000, or 15 percent of the total portfolio value.

Implementing a 30 percent options overlay would bring the portfolio’s risk profile back to its original mandate, something that’s appropriate since a 1 percent reduction of beta exposure requires an additional 2 percent of the portfolio to be “overlayed.”

While effective in reducing risk, there are potential issues of which investors (and advisors) should, of course, be aware.

First, options, while simple in theory, can be complex instruments for some, and their performance is dependent on a few moving parts. It’s why investors and advisors should be well-versed in their various uses before even attempting to incorporate them as part of the portfolio. Luckily, third-party investment firms that specialize in options strategies can assist in the explanation and implementation.

Second, managing these strategies can be time consuming, and because of the inherent multiplier in most listed options, caution and due diligence are warranted— another reason for consulting a specialty firm.

Ultimately, for advisors who find themselves concerned with a client’s portfolio composition in the current market environment, a number of effective strategies exist to rebalance risk without incurring a taxable event. Overlaying the portfolio with an options strategy is one, and represents a viable mechanism, leading to greater comfort and reassurance for advisor and client alike.

Eric Metz is president and chief investment officer of SpiderRock Advisors, a tech-enabled asset manager providing options strategies to institutions and other Registered Investment Advisors.