Options can also give clients tax-management benefits—the premiums lost on expired options can be harvested as capital losses, allowing investors to offset gains taken elsewhere. Using option premiums to conduct the sale of a position can also help offset gains on it, and gains incurred by the sale of options can be offset by the purchase of an equivalent option.
Options Versus Volatility
Volatility increases interest in options for multiple reasons. First, as Donnelly notes, many advisors are using options to hedge positions or an entire portfolio and to manage the beta in their portfolios.
Volatility also makes strategies that write or sell options a better buy for investors, since option premiums increase with volatility, says Doug Kramer, co-head of qualitative and multi-asset class investing at Neuberger Berman.
“Higher premiums gives us more protection and cash flow to withstand these downswings,” says Kramer. “We’re in an interesting moment where the volatility regime appears to have changed somewhat. We’re in an environment where the writing of the options is producing materially higher cash flows than it has in the past.”
Neuberger Berman offers put-writing strategies in both separately managed accounts and in a ’40 Act mutual fund—the Neuberger Berman U.S. Equity Index PutWrite Strategy Fund (NUPIX), which Kramer co-manages. Instead of owning an equity index like the S&P 500 via a mutual fund or an ETF, NUPIX writes put options that give the buyer the right to sell the index at a specified price.
The CBOE S&P 500 PutWrite Index has outperformed the S&P 500 itself with lower volatility over the past 25 years, noted Kramer. In October, when the S&P 500 was down 7%, NUPIX was down 5%.
Mark Esposito, the president of institutional options trader Esposito Securities, says that advisors who embrace options only during volatility are missing the point of using them and the best opportunities for implementing them. Just trying to capture success when the VIX goes up, he says, is “not always a good use of capital,” says Esposito. “That’s an unsophisticated way to put on a trade during a turbulent market.”
Instead, most advisors should implement options between periods of volatility when premiums are lower, he says.
Speaking at the Inside Alternatives conference, Peter Raimondi, founder and CEO of Dakota Wealth Management, agreed. “You want to buy when there’s no volatility,” said Raimondi. “When the VIX is going up and the market is going down, it tells you the market is not on the put side. You want to buy puts when the market is going up.”