The proliferation of options-based strategies in the last several years means investors now have an array to choose from. Understanding the benefits of options can help advisors and investors determine where best to slot these strategies into their portfolios.
Risk Management for Equity Exposures
Equities, though volatile of late, carry an established long-term risk profile for investors. The last few years have yielded a significant drawdown in equities, however, and much remains uncertain in the first half. Inflation and the Fed interest rate path loom over markets, underscoring the need to mitigate potential downside losses within equities.
Index options generate less volatility than single stock exposure in addition to carrying a reduced risk profile. Premiums earned from writing calls create additional income that can serve as a buffer during equity drawdowns. This means options create the potential for enhanced risk-adjusted returns within equities.
Diversification
The income potential of options strategies makes them a strong complement to any income sleeve. However, while bonds make up most traditional income strategies, options offer diversification from fixed income strategies due to their equity tilt.
Additionally, fixed income exposures derive their income based on interest rates and carry significant interest rate risk. Options-based strategies that derive their income from premiums earned and derivatives sidestep direct rate risk. In the current market environment, this added layer of diversification matters.
Beneficiaries of Volatility
Persistent inflation and elevated interest rates continue to drive market volatility. While it’s a bumpy ride for investors, options potentially capitalize on heightened volatility.
Implied volatility, or what markets believe the future volatility of a stock will be, can impact option prices and value. Greater implied volatility increases the value of an option, creating the potential for greater premiums. This then translates to greater income potential for options-based strategies during periods of elevated volatility.
Enhance Your Portfolio with Options Strategies
Gateway Investment Advisers, an affiliate of Natixis Investment Managers, offers several options strategies. The firm also brings over 45 years of options-based investing to the table. Their most recent fund, the Natixis Gateway Quality Income ETF (GQI) launched in December 2023. The fund seeks reliable cash flow derived from option premiums and equity dividends.
GQI offers exposure to quality stocks within the S&P 500 that generate cash flow and strong balance sheets, as well as demonstrate consistent earnings and profitability. The equity exposures are complimented by a laddered call option strategy on the S&P 500 Index. The options are overlayed on half the portfolio, allowing for the other half to participate in market upswings, balancing income potential with capital appreciation.
The fund makes a strong addition to a portfolio’s equity allocation, adding risk-adjusted exposure. It’s also a noteworthy complement within the income sleeve as an alternative to dividend yield strategies. GQI is actively managed, fully transparent, and has an expense ratio of 0.34%.
For more news, information, and analysis, visit the Portfolio Construction Channel.