The latest bout of losses for stocks, along with declines in traditional safe assets, could make options strategies attractive for investors seeking some portfolio income and protection. Investors are grappling with the intensifying war in the Middle East, along with a sharp surge in oil and gas prices. Brent oil futures briefly topped $119 a barrel on Thursday, and the Dow Industrials tumbled about 400 points in afternoon trading before recovering. Even gold wasn’t spared from the sell-off, as spot prices dropped more than 4% Thursday. For investors who are white-knuckling through these volatile times, options might complement a diversified portfolio and provide some income in rocky markets, according to Ashton Lawrence, certified financial planner and senior wealth advisor at Mariner Wealth Advisors in Greenville, S.C. “Around options, it depends on where investors are in their lives and what they may be looking for,” he said. Here are a couple of the strategies he likes in these tumultuous times. Cash-secured puts Some investors might be sitting on a pile of cash and are nervous about redeploying the money into the market as it’s sliding. This is especially the case for individuals nearing retirement. “They have that feeling of ‘OK, I have this big cash pile, but I don’t necessarily feel like investing in equities at this moment,'” said Lawrence. A put option gives the investor the right to sell at a stated price – known as the strike price – before a certain date. With a cash-secured put, the investor writes the put option and holds enough cash on the side to buy the stock in case that put is exercised. This way, the investor collects income from the option premium, as well as yield from the money market funds where they are holding the cash. “What they buy varies,” Lawrence said. “Some people say they don’t feel comfortable with individual stocks, but we can also do broad market exposure.” For example, this might involve using the State Street SPDR S & P 500 Trust ETF (SPY) and tying the option to that fund. Be aware that there is no free lunch: One risk for investors using this strategy is that the stock declines sharply below the strike price, and they still wind up having to buy the stock at the higher price if the put is exercised. Covered calls Call options allow investors to buy an asset at a certain strike price before an expiration date. With a covered call, you sell an investor a call option against an asset that you already own. You get to pocket the premiums from the option writing, but you must be ready to give up the stock if the call is exercised. That means if the stock happens to take off, you may miss out on significant appreciation. With the recent sector rotation away from tech names, Lawrence has used covered calls on value stocks. “You can collect the dividends from value names, as well as the option income, which gives you a double whammy for the income investors,” he said. As always, investors should work with a financial advisor to determine whether options strategies can complement their long-term goals and their risk appetites.
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