Investing Ideas

Liquid alternatives: The power of equity options-based strategies

Thoughtfully designed and well-executed equity options-based strategies are outcome focused investments that allow investors to remain invested while mitigating downside risk, reducing volatility, or generating income.

By: Mitch Livstone Eric Granat Sladja Carton
Updated: 4/10/2024
Key Takeaways
  • In an uncertain market landscape with potentially shifting stock/bond correlations, investors can face difficulty in staying committed to equities, often resulting in emotional market-timing errors.
  • Equity options-based strategies offer investors a straightforward way to remain invested in the market while reshaping the risk/return profile of their equity allocations to incorporate complementary defensive or income-oriented features.
  • These strategies combine a long equity portfolio with put and/or call options and typically entail three approaches: 1. defensive long put option strategies, 2. defensive collar strategies, 3. yield generating call option selling strategies.
  • Options-based strategies can address a broad spectrum of investor risk profiles and offer investors a way to position for several specific portfolio scenarios of concern. Prior to implementing these strategies, investors should clearly define their investment objectives and understand how each strategy’s design aligns with those objectives.
  • In our view, successful equity options-based strategies, regardless of their specific objective, should incorporate certain key design elements to minimize costs and market-timing risks; ensure diversification with varying expirations and strike prices; and maintain a degree of equity upside participation, where possible, while actively rebalancing exposures.
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Diversification and asset allocation do not ensure a profit or guarantee against loss.

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