How to Win Clients & Protect Portfolios

Transcription

1 Ugo Egbunike, Moderator Director of Business Development ETF.com How to Win Clients & Protect Portfolios Howard J. Atkinson, Panelist Managing Director Horizons ETFs Management LLA Michael Khouw, Panelist Managing Director & Primary Strategist Dash Financial Scott Nations, Panelist President & CIO NationsShares Kevin Simpson, Panelist Portfolio Manager Capital Wealth Planning

2 How to Win Clients & Protect Portfolios Ugo Egbunike Moderator Director of Business Development ETF.com

3 Howard J. Atkinson Panelist Managing Director Horizons ETFs Management LLC Scott Nations Panelist President & CIO NationsShares Michael Khouw Panelist Managing Director & Primary Strategist Dash Financial Kevin Simpson Panelist Portfolio Manger Capital Wealth Planning

4 Why Look at Options? Howard J. Atkinson Panelist Managing Director Horizons ETFs Management LLC

5 Short -Term Mid-Term and Long-Term Risk of Rising Interest Rates In June 2013, Ben Bernanke suggested that the U.S. Federal Reserve would evaluate reducing its bond-buying program later in 2013 Rates subsequently rose aggressively and bond markets suffered all summer 0.40% 0.30% 0.20% 0.10% 0.00% -0.10% -0.20% -0.30% U.S. Treasury Performance: May - December 2013 Short-Term U.S. Treasuries Mid-Term U.S. Treasuries Long-Term U.S. Treasuries 2.00% 0.00% -2.00% -4.00% -6.00% -8.00% % % % -0.40% % -0.50% 4/30/13 5/31/13 6/30/13 7/31/13 8/31/13 9/30/13 10/31/13 11/30/ % Short-Term U.S. Treasuries are represented by the Barclays Capital U.S. 1-3 Year Treasury Bond Index Mid-Term U.S. Treasuries are represented by the Barclays Capital U.S Year Treasury Bond Index Long-Term U.S. Treasuries are represented by the Barclays Capital U.S. 20+ Year Treasury Bond Index Source: Bloomberg, between April 30, 2013, and December 31, 2013

6 Duration Matters More Attractive Risk/Return Profile In the 1990s, a 1% rise in interest rates put at risk approx. 6 months of yield Today: Unattractive Risk/Return Profile Today, a 1% rise in rates puts at risk close to 4 years of yield 10 9 Duration (yrs) Yield (%) Source: Fiera Capital Corporation between January 1997 and December 2013.

7 The Income Challenge Fixed Income Historically, bonds and fixed income securities have been viewed as a lower risk asset class than equities Today, bonds offer lower yields than many investors are happy with; they also face increasing risk from the possibility that interest rates could rise Equities Broad stock indices are generally viewed as offering higher returns over the long run than bonds, but also to have higher risk and generally lower yields The S&P 500 Index (Total Return) has appreciated 186.6% since Mar. 10, 2009 * Fixed Income Equities *Source: Bloomberg, from March 10, 2009 to October 31, 2013

8 A Conservative Approach A covered call-writing strategy can potentially offer a number of advantages over investing in the same portfolio of stocks without an options overlay. Key advantages: Potentially higher yield than dividends alone Can potentially reduce volatility of returns relative to the same portfolio of stocks without calls written on them Points to Keep in Mind: Can still see negative returns in certain market conditions (e.g., a bear market); negative returns may be offset by call premium generated Returns typically lag in bull markets Strategy will incur additional commissions from options trading which could decrease performance

9 Trading Abnormal Returns The strategy has the potential to trade away a low level of statistically abnormal monthly returns in exchange for additional income from call premiums, while maintaining exposure to statistically normal monthly returns. 1 Log-normal distribution: a continuous probability statistical distribution of a random variable whose logarithm is normally distributed. 2 Standard deviation or Std Dev : a statistical measure of the dispersion of a set of data (in this case, equity returns) from its average or mean.

10 Covered Call Strategies How a typical out-of-the-money (OTM) covered call strategy may be expected to perform during various market conditions: Source: Horizons ETFs Management (USA) LLC

11 Disclaimer (1) Before investing you should carefully consider the Funds investment objectives, risks, charges and expenses. This and other information is in the prospectus. Please read the prospectus carefully before you invest. To obtain a prospectus without charge, please visit the EDGAR Database on the SEC s Internet site at Paper copies of a prospectus are also available without charge upon request from Exchange Traded Concepts ( ), or electronic copies can be downloaded in PDF format directly from Funds distributor: Foreside Fund Services. There are risks involved with investing, including possible loss of principal. The Funds are non-diversified and may invest a greater portion of their assets in securities of a small number of issuers which may have an adverse effect on Funds performance. Concentration in a particular industry or sector will subject the Funds to loss due to adverse occurrences that may affect that industry or sector. The Funds risks not benefiting from potential increases in the value of underlying securities above the exercise prices of the written covered call options, and is subject to the risk of declines in the value of such securities. See prospectus for specific risks regarding the Funds. Individual shares of the Horizons-branded exchange traded funds (the Funds ) may be purchased or sold in the secondary market throughout the regular trading day on the New York Stock Exchange through a brokerage account. However, shares are not individually redeemable directly from the Funds. Each Fund issues and redeems shares on a continuous basis, at NAV, only in blocks of at least 50,000 shares ( Creation Units ), principally in-kind for securities included in the relevant Index. The Creation Unit for HSPX is 50,000 shares and the Creation Unit for HFIN is 25,000 shares.

12 Disclaimer (2) An option is a contract sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price within a certain period or on a specific date. A covered call option involves holding a long position in a particular asset, in this case U.S. common equities, and writing a call option on that same asset with the goal of realizing additional income from the option premium.

13 Covered Calls Kevin Simpson Panelist Portfolio Manger Capital Wealth Planning

14 Covered Call Basics Covered call writing is either the simultaneous purchase of stock and the sale of a call option, or the sale of a call option covered by underlying shares currently held by an investor. Generally, one call option is written for every 100 shares of stock owned. The writer receives cash for selling the call but will be obligated to sell the stock at the call's strike price if assigned, thereby capping further upside stock price participation. In other words, an investor is "paid" for agreeing to sell his holdings at a certain level (the strike price). For this reason the covered call is considered a neutral to moderately bullish strategy. On the downside, limited stock price protection is provided by the premium received from the call's sale. The upside profit potential if assigned is limited to the premium received from the call's sale plus the difference between its strike price and the stock purchase price. If assignment is not received and the call expires out-of-the-money and with no value, the upside profit potential is any gain in share value plus the premium received. The downside loss potential is substantial and comes entirely from owning the underlying shares and is limited only by the stock declining to zero. The break-even point is an underlying stock price equal to the purchase price of the underlying shares less the premium received. As with any short option position an increase in volatility has a negative financial effect on the covered call while decreasing volatility has a positive effect. Time decay has a positive effect.

15 Covered Calls Sell Stock Options to Create Cash Flow: Buying Stock Options can be risky, however Selling Stock Options actually reduces risk it is a conservative investment strategy and is widely used by institutions and hedge funds

16 Covered Calls Cash versus Market Gains The covered call strategy helps investors sell for a profit - Market Gain Whether you sell or not, you are entitled to keep the option payment (the rent ) paid to you up front - in Cash

17 Covered Call Strategy CBOE S&P 500 Buy Write Index (BXM): Benchmark for strategy Buy portfolio of S&P 500 stocks Write (sell) cash-settled S&P 500 Index options every 3rd Friday for income Announced in 2002 study by Duke U. Data history back to June 30, 1986 Innovative Index of the Year in 2004 More than $20 billion in buy-write funds

18 Cash-Covered Puts Michael Khouw Panelist Managing Director & Primary Strategist Dash Financial

19 Cash Covered Puts What is the strategy? Answer. An investor sells puts on an underlying asset, while maintaining deposits sufficient to satisfy the unmargined purchase of the underlying at the put strike price. Isn t selling puts a risky strategy? Answer. Risk is relative. Employed correctly the total risk of loss is lower than purchasing the underlying outright, however the profile of expected returns does change.

20 Example Purchase 100 shares of IWM at the prevailing market price ($115). Total cost, $11,500 = total risk in the unlikely event that IWM goes to zero. Alternative, sell a 1 month at-the-money ($115 strike) put for $2.00, secured by $11,500 in deposits. Max risk $11,300 in the event that IWM goes to zero.

21 Why is the Risk Lower?

22 Buy Low(er), Sell High(er)

23 To Buy SPY at Avg Multiple Need a NET purchase price ~ 5.5% lower than the current price, or ~ $10 lower than the current price of $ Sell the 3 month 3.5% out-of-the-money put, collect ~ 1.5% of the underlying price or 1.50.

24 Options Premiums are Volatile? How much a put seller collects, in terms of the % of the underlying for a put of a given moneyness does vary a lot. Observe the 5% otm 3 month puts for SPY since January 2005.

25 How Much Does that Matter? Implied Volatility Value of 95% moneyness 3m put Price & Multiple of SPX January %.6% $1,430, 16.7x January % 3.8% $1,465, 17.3x January % 6.5% $900, 15.3x January % 2.5% $1,110, 18x January % 2% $1,260, 15x Max 3 month Loss 9/24/ % SPX -27% Sale of 5% otm put Max gain SPX 3/9/ % SPX 13.5% <Max gain put sale 11/20/08

26 Vertical Spreads Scott Nations Panelist President & CIO NationsShares

27 Collect Premium But Define Risk Some SPY Call Options: Strike Px Option Px 183 Sell This Call, Risk is Unlimited Sell That Call & Buy 188 This Call, 0.77 Risk is Defined Soucre: Nations

28 The Resulting Call Spread Short The 184/187 Call Spread At 1.19 Collect 2.22 For Selling The 184 Call, Pay 1.03 For Buying The 187 Call. That Net Of 1.19 Is Ours To Keep Maximum Profit = 1.19 Maximum Loss = 1.81 [( )+1.19]

29 The Resulting Call Spread Short The 184/187 Call Spread At 1.19 Maximum Profit of 1.19 With SPY Below 184 At Expiration. The Likelihood Is 58%

30 Profit/Loss At Expiration $2.00 $1.00 $ $1.00 -$2.00 SPY Price At Option Expiration

31 The Resulting Call Spread Short The 184/187 Call Spread At 1.19 Maximum Profit of 1.19 With SPY Below 184 At Expiration. The Likelihood Is 58% Breakeven of The Likelihood Of Being Above Is 36%

32 Profit/Loss At Expiration Breakeven of SPY Price At Option Expiration

33 The Resulting Call Spread Short The 184/187 Call Spread At 1.19 Maximum Profit of 1.19 With SPY Below 184 At Expiration. The Likelihood Is 58% Breakeven of The Likelihood Of Being Above Is 36% Maximum Loss of 1.81 With SPY Above 187 At Expiration. The Likelihood is 26%.

34 Profit/Loss At Expiration $2.00 $1.00 $ $1.00 -$2.00 SPY Price At Option Expiration

35 The Resulting Call Spread Short The 184/187 Call Spread At 1.19 Maximum Profit of 1.19 With SPY Below 184 At Expiration. The Likelihood Is 58% Breakeven of The Likelihood Of Being Above Is 36% Maximum Loss of 1.81 With SPY Above 187 At Expiration. The Likelihood is 26%.

36 The Resulting Call Spread Short The 184/187 Call Spread At 1.19 Maximum Profit of 1.19 * 58% = 0.69 Maximum Loss of 1.81 * 26% = 0.47 At The Risk Of Oversimplifying.

37 Thank you. Questions?

38 Howard J. Atkinson Panelist Managing Director Horizons ETFs Management LLC Scott Nations Panelist President & CIO NationsShares Michael Khouw Panelist Managing Director & Primary Strategist Dash Financial Kevin Simpson Panelist Portfolio Manger Capital Wealth Planning