Remodeling Portfolios to Shift Growth to Income

By Joanne M. Hill via

Just like homes can be remodeled to meet the evolving needs of homeowners, Investment portfolios can also be “remodeled” to better match investment goals such as higher income, growth or lower risk.

Options are among the best portfolio remodeling tools; they can be utilized to achieve a target level of income and risk without disturbing other parts of the portfolio. Options allow an investor to buy (call) or sell (put) a security at a predetermined price (strike price) on or before a specific date (exercise date).

Covered-call writing is a popular strategy that involves selling call options on stocks in exchange for receiving upfront premiums. It gives stock owners the ability to convert uncertain future upside returns into upfront premium income and reduces risk, as the premium income helps cushion downside returns.

Remodeling the S&P 500 Aristocrats Index to Target Income

Remodeling with options can be incorporated into equity index strategies through a rules-based approach similar to that which is used in smart beta or factor strategies. Such remodeling can solve the dilemma faced by equity income investors, helping them both satisfy their need for income and achieve growth from capital appreciation.

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