For this week’s episode of ETF 360, ETF Trends CEO Tom Lydon and CIO Dave Nadig spoke with Hamilton Reiner, PM and Head of U.S. Equity Derivatives for J.P. Morgan Asset Management, who discusses the JPMorgan Equity Premium Income ETF ($JEPI)‘s $1 billion one-year hit, as well as the strategy behind it.

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With 30 years of declining rates and the threat of inflation, rising interest rates are something to be considered. As far as how Reiner feels regarding an options overlay strategy, he notes how advisors are trying to put a certain amount of strategy into their client’s portfolios and mainly focus on the potential outcome and total return.

As an active equity manager, when considering what dividends will look like over the next couple of quarters, Reiner explains how he believes companies will begin to feel more comfortable about either raising or growing dividends coming out of COVID-19.

He adds, “when I think about yield, right now, I think yield is tough to come by, but I would anticipate dividends increasing at this point moreso than staying flat, as earnings are good, and we’re emerging from COVID.”

Keeping It Alternative

With financial advisors and individual investors taking their money and heading home on the income side, $5 trillion in money market funds are at huge levels currently, and alternative income has proven to be a popular topic.

Looking at a couple of points, Reiner first notes how many advisors shouldn’t be using leverage to accomplish their goals. Reiner is also a fan of repeatable investing choices, with concepts that are measurable and can be replicated.

“When I think about alternative income, there is no free lunch,” Reiner states. “You have to make a trade-off. In the case of a call overriding strategy, you’re making that conscious decision to say, ‘I’m willing to potentially forego some of the upside in the market to generate some income.’ But by doing that, you’re actually solving for a problem in which many if not all advisors have – where can you find income in a bonafide portfolio.”

When asked about options and the strange volatility market that has been seeing, and how sensitive J.P. Morgan’s strategy is to the volatility that shows up in the options premium, Reiner explains that any time there’s a sale of options premium, the higher the level of market volatility, the more premium will be brought in.

There’s a look to balance upside and income instead of trading off one for the other. So, when market volatility is elevated, there’s a look to sell an option that’s farther out of the money that will generate more income than average. When the volatility goes down, the option will be less far out of the money and generate less income as well.

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