Articles about Options

The Ultimate Income Portfolio: 7.1% Yield with Low Risk, 2014
In July of 2010, I introduced a portfolio-construction strategy called the Ultimate Income Portfolio (UIP). I have updated that strategy annually, revising the holdings and reviewing the previous year’s results. My goal is to provide the maximum available yield while diversifying to reduce risk. I set a target risk, which is within the range that most individual investors seek. I also sell covered call options against portfolio holdings to increase income.

In this article, I analyze the performance of last year’s UIP and generate the UIP for 2014-15. The result is a portfolio that yields 7.1% with a risk level equivalent to a 70/30 stock/bond index fund. I also explore some of the lessons learned from four years of tracking and revising the portfolios.
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Managing Exposure to Extreme Markets, 2011
Volatility in the equity markets has subsided, courtesy of a strong bull market and fading memories of the 2008 financial crisis. Risks remain, however, ranging from the turmoil in northern Africa to sovereign debt instability in Europe. Investors can take advantage of the complacency in the equity markets by purchasing inexpensive insurance against adverse events.

The most direct way to limit risk is through tail insurance. The simplest form of tail insurance is to purchase a derivative that limits portfolio losses under extreme adverse conditions.
See full article at Advisor Perspectives...
Using Put/Call Open Interest Ratios to Screen for High-Yield Dividend Stocks, 2011
I just ran across an article that Kapitall has on Seeking Alpha that posits an interesting and, I believe, useful way to screen for dividend paying stocks. The basic idea is to look for high-yield stocks that also have a high level of open interest in call options vs. put options.

What does this indicator mean? In theory, people buy call options when they believe that a stock is likely to go up and they buy put options when they believe a stock is likely to decline. The premise in the Kapitall article is to look for stocks with high yields that also appear likely to go up according to the open interest on puts vs. calls. So, these stocks seem like they are likely to be winners on the perspective of yield and price appreciation.
See full article at Seeking Alpha...
How to Build a Low-Risk High-Income Portfolio, 2011
Prominent investors, including Bill Gross and Warren Buffett, now say that the yields on long-term government debt do not justify the risks. But is this perception correct? I offer a way to answer that question – and to construct a low-risk high-income portfolio – using the prices of put options to derive the true risk levels of various asset classes.
See full article at Advisor Perspectives...
Inexpensive Protection Against Rising Rates, 2010
We are standing at challenging point in history for financial planners. Government bond yields are low, as is the apparent rate of inflation. Investors are far more concerned with the safety of their principal than with the risk of losing purchasing power.

As is so often the case, the biggest risks are those that we discount.

The possibility of a surge in interest rates appears to be today’s ignored risk, despite the warnings of many experts, including David Einhorn, Bill Gross, and Seth Klarman.

Regardless of the probability of various scenarios for future inflation or the mechanisms by which they may play out, investors and advisors should consider how to most cost effectively protect their portfolios against a rise in interest rates. Perhaps the most powerful way to do that is by purchasing out-of-the-money put options on bonds.
See full article at Advisor Perspectives...
A Better Way to Invest in Gold, 2010
When I last wrote about gold one year ago, I said that gold was sufficiently risky that an investor’s best strategy would be to purchase at-the-money call options on GLD (the gold ETF) rather than to buy GLD directly.

At-the-money GLD options have appreciated by 69% since.

I did not go as far as to advocate a pure-option strategy – that would have been a massive, bullish bet on gold; instead, my recommendation for exposure to gold was a combination of a bond ETF and GLD call options.

As I will discuss, that strategy has performed well on an absolute and risk-adjusted basis.
See full article at Advisor Perspectives...
Risk Management through Costless Collars, 2010
Nassim Taleb and Zvi Bodie are among those who advocate a wealth management strategy that includes options. Despite their evangelism, though, options are rarely a part of retirement portfolios.

The risk-limiting properties of options will be increasingly valuable as investors react to the amplified volatility of the last two years. The costless collar, a straightforward options strategy, gives investors the upside of an asset class (such as equities) while absolutely limiting the downside risk.
See full article at Advisor Perspectives...
Managing Downside Risk in Retirement Planning, 2009
The bear market of 2007-2008 caused widespread concern among investors about the long-term downside potential of equities in retirement planning. Investors who were largely or completely invested in equities were painfully exposed. That need not have been the case. Boston University professor Zvi Bodie has advocated a strategy that offers investors some of the upside potential in equities tempered with downside protection against bear markets and a low-risk inflation hedge via heavy allocation to TIPS. While I expect few adopted Bodie’s strategy, those who did likely remain well-positioned to reach their retirement goals.
See full article at Advisor Perspectives...
Opportunities in Options Markets, Summer 2009
Back in November 2008, I wrote an article about what appeared to be a substantial disconnect in the way that options of individual stocks were being priced. This was due to the very high level of fear in the market. This anomaly was most easily exploited by selling options. In June of 2009, I wrote an article looking at how well this strategy had worked out. In this article, I look at the very different options opportunities that exist today. The anomalies that existed in late 2008 have largely disappeared, but there are a range of other opportunities that look substantial. In describing the market opportunities in options, this article introduces some more sophisticated concepts in options valuation and trading.
See full article at Seeking Alpha...
Revisiting an Options Strategy from 2008, 2009
The prices at which options on various stocks and ETFs trade provide a great deal of insight. Back in November of 2008, I noted that options on a range of defensive stocks were highly over-priced relative to the price of options on the S&P 500. In early 2007, I noted that options prices were signaling a massive increase in volatility in major asset classes. The prices of options have provided remarkably consistent and reliable signals through the very volatility market conditions of 2008-2009. The key variable in options prices is implied volatility...
See full article at Seeking Alpha...
Profiting from Risk Aversion, 2008
In October and November of 2008, we have seen the equity and bond markets descend into a state of extreme risk aversion. Investors need look no further than the VIX index to see this. VIX is often referred to as the “fear index” because it goes up when investors drive the prices of options upwards in an attempt to buy some protection for their portfolios (pdf). VIX has been closing in the 70 to 80 range for weeks—albeit with periods of lower volatility in between. VIX actually measures the implied volatility of options on the S&P 500 index that are very close to expiration—think near term---30 days or so. While many investors are focusing on the short-term swings, there is a great deal of information available by looking at longer time horizons (i.e. longer dated options). There are also substantial opportunities to manage portfolio risk for the investor willing to pay attention to the levels of implied market risk in options.
See full article at Seeking Alpha...
Who Are Google Options Good For?, 2007
Employee stock option grants are available to roughly 15% of white collar workers in companies with 100 or more employees. What is striking in discussions that I have had with employees who have stock options and advisors who have clients with substantial stock options holdings is that very few of these employees or their advisors are confident about how to manage these options. I have written about this issue before, but a recent discussion that I had with a tech worker about Google’s (GOOG) new approach to employee stock option grants got me interested in writing an article: (pdf file)

Google’s new program (called Transferable Stock Options [TSO] or Gooptions) allows employees with vested stock options to sell those options to the highest bidder in a ‘market,’ where the set of bidders is limited to...
See full article at Seeking Alpha...

Google Employee Stock Options: The Sequel, 2007
Employee stock option grants are available to roughly 15% of white collar workers in the U.S. For many of these people, stock options represent a large fraction of their total wealth. Stock options have made many a millionaire, but they have also left many people without much wealth at all. Google (GOOG) has launched a new program that allows employees with vested stock options to sell these options via an unusual internal market.
See full article at Seeking Alpha...

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Using Options in Wealth Management

This book, written by Geoff Considine, is available for sale from our website, here.

This e-book revisits the key themes in many of the above articles and looks at how the perspectives provided in them have held up.  The general level of the discussion is at or slightly above that provided in the articles.  With the book, I have the 'room' to go into further depth and to pursue various additional concepts. -GC