“In the rising interest rate environment, we’ve maintained good numbers in jobs, and Goldman Sachs thinks we’ll get another raise in December” with three or four additional rate hikes next year, says Martin. “Now we’re looking for alternatives for fixed income, so that’s where we see selling covered call options as a good alternative for fixed income through a rising rate environment.”
Shelton offers advisors a suite of income-generating options strategies within separately managed accounts, in addition to equity and fixed-income strategies within mutual funds. Historically, Shelton has raised between 5% and 7% in yearly options premiums, said Martin, on top of whatever cash flows a portfolio’s underlying positions generate.
As interest rates and volatility rise, the higher premiums also make put writing a viable income strategy, says Donnelly. While covered calls are best used with an equity-heavy portfolio, put-writing does best when accompanied with fixed-income investments.
Customize, Or Buy The Fund?
While some institutions and investors may achieve their desired benefits through a fund like NUPIX or a put-writing ETF, Martin argues that it makes more sense to run options strategies in a more bespoke manner in managed accounts.
“We’re able to manage the tax consequences better, especially in meeting the clients’ needs, because selling options generates short-term capital gains,” Martin says. “Some people are looking for those gains; others would like to see them reduced. We’re able to offset some of those large gains with the option premium. We can also sell losers to offset realized gains, but mutual funds and ETFs often don’t have that level of flexibility.”
On the other hand, mutual funds and ETFs offer access to options at low minimums and with less paperwork and overhead. Advisors may have an easier time explaining a strategy contained within a mutual fund or ETF wrapper to their clients, Esposito says—and for compliance-conscious advisors, a prepackaged options solution is probably the best choice.
“You’ve got to have a sophisticated investor if you’re going to put on a bespoke options trade,” Esposito says. “There have been lawsuits and concerns from the SEC about that, and I think it can be a dangerous business. A lot of times, the advisor at an RIA barely understands it.”
While options strategies are becoming more popular, more accessible, less expensive and better understood, compliance concerns remain a serious obstacle to implementing these strategies in client portfolios, Cott told advisors at Inside Alternatives.
“It’s more difficult now for advisors, after the financial crisis and the debate over the DOL rule,” Cott said. “At this point, there’s a very small percentage of the thousands of advisors that are actively using options as an asset allocation tool in their overall portfolio design on a regular basis.”