Options for Wealth Management

Raimondi, a serial wealth management entrepreneur, has long used options strategies in client portfolios and makes options paperwork part of his firms’ typical on-boarding procedures so that trades and overlays may be applied efficiently when opportunities arise. He’s on the vanguard of a growing movement among individual wealth managers to offer options to their clients.

Donnelly notes that until recently it was options’ cost and complexity that made wealth managers wary of them. “The industry was in a position where strategists had to impose high minimums in order to be successful, but that’s no longer the case,” says Donnelly. “Because advisors were unable to access these strategies for their clients, they stopped looking into them—if they couldn’t really use them, why would they want to learn more about them? And so we’re now in the early stages of the evolution of options for the broader wealth management space.”

Price compression has allowed advisors to use bespoke solutions that hedge large positions in client portfolios, says Donnelly. After a decade-long bull market run, many investors are overconcentrated in U.S. equities, or a handful of technology stocks like the FANGs, but they are psychologically reluctant to sell their positions.

If, meanwhile, fixed income faces a flat yield curve, rising rates and relatively low yields, it may be unattractive risk for the return if investors were to rebalance out of their stock positions to bonds. It would also be tax-inefficient. While some high-net-worth clients may rebalance via an exchange fund that can lock their assets up for a number of years, options strategies can offer more balance between liquidity and tax efficiency.

“Family office clients are sitting on block positions [of stocks] that have had pent-up growth and low basis, so the discussion comes in to see if there’s a way to carve out some of the position to participate in the upside, sell a call to protect on the downside,” said Cott. “Collaring provides the best of both worlds.”

Collaring involves buying a put and selling a call at offsetting prices—at zero cost, since one part of the strategy pays for the other. The put offers a premium to cap potential losses from a position, while the call pays for the downside protection but reduces the potential upside to a stock, resulting in lower potential volatility.

Call writing, selling the right to buy a stock at a specified price, can also be used to manage the volatility exposure of portfolios whose allocations are out of balance without selling the portfolio’s holdings themselves. “Historically, rebalancing has involved selling stocks and buying bonds, but we can bring beta down without having to sell anything to do it,” says Donnelly. “Your assets remain intact, the risk profile is augmented, and no tax bill has been triggered.”

Options for Income

Before the recent increase in volatility, advisors were drawn to options mainly for strategies like covered calls, as bond yields sat at historically low levels for several years, says Barry Martin, a portfolio manager with Shelton Capital Management.