As asset managers, we often meet investors seeking to enhance portfolio returns while managing risk. A Separately Managed Account (SMA) allows them to choose a covered call strategy aligned with these goals. But what is an SMA?
A SMA is a type of investment account managed by a professional advisor or asset manager on behalf of an individual investor. Investors choose SMAs for their ability to access specific managers who provide personalized strategies, such as covered call writing, to meet their investment goals.
How to Choose the Right Manager
For those seeking a covered call strategy, selecting the right manager involves considering their experience, track record, and the types of strategies they offer:
- Expertise in Covered Call Strategies: Investors should look for managers who specialize in covered call writing and options trading and have a deep understanding of options markets. These managers can better navigate the complexities of option pricing, volatility, and market trends.
- Track Record: While past performance cannot guarantee future performance, evaluating a manager’s historical performance can provide insights into their ability to generate consistent returns and manage risk effectively.
- Type of Strategy Offered: Different managers may offer various covered call strategies, from conservative to aggressive approaches. Investors should choose a manager whose strategy aligns with their investment goals and risk tolerance.
Transparency
Transparency is another key feature that attracts investors to SMAs when employing a covered call strategy.
- Clear Reporting: Investors using an SMA can typically expect detailed reports on the holdings, trades, and performance of their accounts. This level of clarity helps them understand exactly where their money is invested and how the covered call strategy is performing.
- Direct Ownership of Securities: Unlike mutual funds, where investors own shares of the fund with other investors, SMA investors directly own the individual securities in their portfolios. This direct ownership provides a clearer picture of their investments and the options written against them.
Risk Management
Effective risk management is essential for preserving wealth, and SMAs provide tools to manage investment risk, particularly when using a covered call strategy.
- Income Generation with Reduced Risk: Covered call strategies involve writing call options against owned securities, generating premium income while potentially lowering risk.
- Individual Risk Profiles: Each SMA can be tailored to match the investor’s risk profile, allowing for a more precise alignment with their investment goals. The covered call strategy can be fine-tuned to balance income generation with the risk of loss.
Three Common Covered Call Strategies Available via SMAs
Investors can choose from various covered call strategies within an SMA framework. Here are three common approaches:
- Dividend-Focused Covered Call Strategy:
- Emphasizes generating steady dividend income by writing calls on large-cap, dividend-paying stocks.
- Seeks to protect against downside while potentially sacrificing some upside potential.
- Ideal for clients seeking consistent income streams from dividends and option premiums.
- Growth-Focused Covered Call Strategy:
- Aims for higher premiums by writing calls on growth-oriented stocks.
- Suitable for clients with a higher risk tolerance.
- Balances potential for greater income with increased risk of losing money due to the more volatile nature of growth stocks.
- Index-Based Covered Call Strategy:
- Utilizes index surrogates like certain ETFs (i.e., SPY or TLT) to write covered calls.
- Depending on the index tracked, it can provide diversified market exposure while generating option premium income.
- Ideal for clients looking to simplify their covered call approach.
Each of these strategies offers unique benefits and risks, allowing investors to select an approach that aligns with their financial goals and risk tolerance.
Comparisons to Other Investment Vehicles
To better understand the appeal of SMAs for covered call strategies, it’s useful to compare them with other common investment vehicles like mutual funds and exchange-traded funds (ETFs).
SMAs vs. Mutual Funds
- Customization: Mutual funds provide a one-size-fits-all approach, whereas SMAs offer tailored solutions, including specifically designed covered call strategies.
- Transparency: SMA investors have full visibility into the individual securities they own and the options written against them, unlike mutual fund investors who only see the overall holdings of the fund.
SMAs vs. ETFs
- Individual Ownership: While many ETFs offer diversified exposure, they lack the direct ownership of individual securities that SMAs provide.
- Management Style: ETFs are often passively managed, whereas SMAs benefit from active management tailored to a client’s needs, including the implementation of covered call strategies.
Conclusion
Separately Managed Accounts offer investors access to professional managers, individualized strategies, and transparency in reporting. Contact Optic Asset Management today to learn whether one of the SMAs we offer is right for you.
Disclosure
The information provided in this article is for educational purposes only and should not be considered as financial advice. Likewise, the scenarios provided are hypothetical and intended for illustrative purposes only. Options trading involves significant risk and is not suitable for all investors. Before engaging in any investment strategy, it is essential to conduct thorough research and consult with a qualified financial advisor to ensure that these strategies align with your individual financial goals and risk tolerance. Past performance is not indicative of future results. Loss of principal may occur. Always review the terms and conditions of any financial products you are considering and seek professional guidance from an investment advisor and a tax professional
