Optic Portfolio Overlay
Unlock the Potential of Your Holdings
No Portfolio Changes Needed
Option Strategy
There are several ways to approach option trading. Optic utilizes technical analysis to determine optimal times to sell in and out of call positions. It also identifies the ideal call to be selling depending on various circumstances. We actively manage these option positions with the goal of delivering the many advantages of covered call selling while still seeking to capture much of the upside appreciation of the underlying holdings.
Strategy Highlights
This “unfunded” option strategy offers a powerful way to unlock potential income from an investor’s existing portfolio without changing any of its holdings. It is “unfunded” because it doesn’t require the investor to invest any additional cash and instead is overlayed across the investor’s existing portfolio. The strategy sells uncovered calls, or “naked” calls, against a hypothetical stake in an index such as SPY (SPDR S&P 500 ETF Trust) or QQQ (Invesco QQQ Trust), to generate premium income and potentially reduce the volatility of the portfolio.
Benefits
- Does not require any changes to the investor’s existing portfolio.
- Can provide an additional income stream to a client’s existing diversified portfolio.
- Can be customized to fit an investor’s unique needs and preferences.
- Acts as a pure Overlay: Investors can continue to trade their portfolio as they wish without interfering with the Optic strategy.
Features
- Developed by managers with 25 years of options trading experience.
- Actively managed using Optic’s proprietary methodology for selecting the quantity and duration of calls that are written.
- A more agile and responsive approach to the market than traditional, rules-based covered call strategies.
- Historical performance of the SPY Optic strategy goes back to 2009.
Hypothetical Example
The factors described in this hypothetical case are similar to situations Optic Asset Management encounters with clients, but the illustration does not, however, represent the experience or views of any actual client. There is no guarantee that investors will achieve positive results or meet the goals they have set in connection with Optic strategies.
An investor has a well-diversified portfolio that includes stocks, bonds, and other assets. Many of these holdings have substantial unrealized capital gains. The investor is interested in generating potential additional income to supplement existing investment returns without making any significant changes to their portfolio.
Since the portfolio is highly correlated with the S&P 500, the investor engages Optic Asset Management to begin selling SPY calls in their portfolio. Over time, and especially in cases when the market (and their portfolio) are flat or down, the investor may begin to accumulate extra cash flow in their account from the call selling.
At times when the market sees substantial gains, the investor’s portfolio may appreciate dramatically. If so, cash flow from call options will likely decline. In most cases, the fact that the overall portfolio has increased in value offsets the reduced cash flow. But for clients who rely on the income, other sources of income generation may be necessary.
Over time, option overlay strategies like Optic have the potential of reducing the overall volatility of the underlying portfolio.
Frequently Asked Questions
The Optic uncovered call strategy sells calls against a hypothetical stake in an index such as SPY (SPDR S&P 500 ETF Trust) or QQQ (Invesco QQQ Trust), to generate premium income and potentially reduce the volatility of the portfolio.
The strategy involves selling naked, or uncovered, calls against SPY to generate premium income for investors. This must be done in taxable accounts. (See our funded Optic strategies for IRA accounts).
A naked call is an options strategy where an investor sells a call option without owning the underlying asset (uncovered). Selling uncovered calls carries additional risk vs. selling covered calls – in theory, a naked call is subject to unlimited risk of loss. In practice, Optic Asset Management can help you determine how highly correlated your portfolio is to the options that we sell to help reduce most of the risk associated with selling uncovered calls.
Without changing an investor’s underlying portfolio, overlaying an uncovered call strategy aims to generate premium income and potentially reduce the volatility of the portfolio.
Yes, the strategy uses a hypothetical stake in SPY or QQQ and does not require the investor to own the underlying asset.
Although rare, if an uncovered call is exercised, the seller of the call must deliver the underlying asset at the strike price of the option. Since the seller doesn’t already own the underlying asset, they would need to purchase it at market price in order to deliver it. This can result in losses for the seller, particularly if the price of the underlying asset has increased significantly since the option was sold. While Optic Asset Management seeks to avoid such situations, investors should be aware of this and other risks associated with option strategies (see disclosures, below).
Investors should have a portfolio value of at least $500,000.
Optic Asset Management charges a management fee of 0.50% to 1.0%, withdrawn quarterly. Investors are advised to speak with their investment advisor for more details, along with any additional fees they may charge. Options trading is generally more expensive than equity trading and costs vary among brokers and custodians. Transaction costs can significantly reduce return.
Regular performance reports on the models are available on www.optic-am.com. Also, clients will also receive individual performance reports directly from the manager in addition to regular statements from the custodians.
Disclosures
The above example is hypothetical and should not be construed to be financial advice.
Investors should consult with their financial advisor and review all related documentation before proceeding with any of the investments discussed on this website.
Past performance is not a guarantee of future results. No investment strategy can ensure a profit or ensure the investor will avoid loss. The time periods shown were characterized by periods of significant volatility, as well as a sustained bull market from 2009 through 2020. Both factors are likely to have a positive impact on SPY Optic’s performance. Since 2020, equity markets have continued to exhibit significant volatility and uncertainty, including the effects of the COVID-19 pandemic and rapid increases in interest rates. While Watts Gwilliam & Company, LLC intends the SPY Optic Strategy to add value to investment portfolios, especially in flat or down markets, portfolios might underperform in rising markets. The performance presentation shown does not reflect the effect of taxes, which may be a significant consideration for taxable accounts.
Options trading involves risks. Prior to executing option trades, investors will receive from the custodian a copy of Characteristics and Risks of Standardized Options, also known as the Options Disclosure Document, which can be found at www.theocc.com. Clients must be approved for options trading by the custodian prior to Watts Gwilliam & Company, LLC being able to implement SPY Optic.