ETF Options Strategies: Keeping Your Options Open

Transcription

1 Paul Baiocchi, Moderator ETF Analyst, IndexUniverse ETF Options Strategies: Keeping Your Options Open Chintan Kotecha, Panelist Equity-Linked Analyst, US Equity Derivatives Bank of America Merrill Lynch Michael Lally, Panelist Regional Sales Director Capital Wealth Planning LLC Jeffrey D. Wycoff, Panelist Managing Partner Fort Point Capital

2 ETF Options Strategies: Keeping Your Options Open Paul Baiocchi Moderator ETF Analyst IndexUniverse

3 Chintan Kotecha Panelist Equity-Linked Analyst, US Equity Derivatives Bank of America Merrill Lynch Jeffrey Wycoff Panelist Managing Partner Fort Point Capital Michael Lally Panelist Regional Sales Director Capital Wealth Planning LLC

4 The Current State of the ETF Options Market

5 Q1-99 Q4-99 Q3-00 Q2-01 Q1-02 Q4-02 Q3-03 Q2-04 Q1-05 Q4-05 Q3-06 Q2-07 Q1-08 Q4-08 Q3-09 Q2-10 Q1-11 Q4-11 Q3-12 Median notional volume ($bn) ETF option market size & breadth: Median daily ETF option notional volume per quarter Q3-12 ETF option notional volume by asset class Equity $4,416mn 4% 10% Debt $671mn Commodity $620mn Currency $208mn 11% SPY IWM QQQ GLD Other 75% Excluded: SPY $26,296mn IWM $3,392mn GLD $2,433mn QQQ $2,235mn Over the last year, the total notional traded on ETF options has ranged approximately $40-50bn per day. For perspective, listed S&P 500 index notional option volume ranged about $80-95bn Roughly 85% of the total ETF option volume is traded among only four ETFs (SPY, IWM, QQQ, and GLD) Despite this concentration, there is nearly $6bn notional traded per day in the remainder of liquid ETF options Source: BofA Merrill Lynch Global Research. Data through 7 Sep 2012

6 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Applications and trades with ETF options: Gold prices whipsawed in 2011 Underlying of GLD TRADE 1: A put spread hedge on GLD to reduce risk in being long gold Source: BofA Merrill Lynch Global Research. Data through 7 Sep 2012

7 Total return Treasury investment 30-year Treasury Yield Applications and trades with ETF options: US TSY yields near multi-decade lows % % 12% % % % 4% 500 2% 0 0% 30-year Treasury futures TR 30-year Treasury yield TRADE 2: Put options on TLT to hedge a rise in US Treasury yields Source: BofA Merrill Lynch Global Research. Data through 7 Sep 2012

8 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Applications and trades with ETF options: EUR/USD spot rate declining Euro/USD spot rate TRADE 3: Long FXE call options Source: BofA Merrill Lynch Global Research. Data through 7 Sep 2012

9 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 %-age P&L Short Iron Condor Iron condors on GLD for alpha: Hypothetical P&L of a GLD short iron condor 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -20% -15% -10% -5% 0% 5% 10% 15% 20% %-age change in GLD A 1M 88/96 106/114 short iron condor strategy on GLD GLD Iron Condor Options generally trade rich due to a risk premium that accounts for unexpected increases in volatility HFRI Fund Weighted Composite A less risky way to sell options is a short iron condor strategy (short call and put spread) Short iron condor strategies on equity indices globally have performed well over the long term. With ETF options, this strategy can be applied across other asset classes (Gold in this case) Source: BofA Merrill Lynch Global Research. Data through 7 Sep 2012

10 Other ETF Options Strategies

11 Capital Wealth Planning, LLC : Building and managing private portfolios since 2005 Exists at the forefront of implementing covered call strategies on Exchange Traded Funds (ETFs). Over $320 million in our ETF Covered Call Equity Income Portfolio 20+ years trained and experienced option professionals Technology driven platform $250,000 minimum investment

12 Selling Stock Options Options are Cash Flow Generators Others rent from you with an option to buy for a higher price You receive the cash ( rent-dividend ) immediately

13 Current Breakdown:

14 Simple Covered Call Income Analysis: Purchase Strike Option Symbol Shares Price Value Price Price Cash Flow 20-Jun 07/21/12 SPY (40%) 1180 $ $159, $0.38 $ SH (15%) 1635 $36.70 $60, $0.20 $ LQD (10%) 340 $ $39, $0.00 $0.00 MDY (10%) 235 $ $40, $0.30 $60.00 IWM (10%) 505 $78.75 $39, $0.40 $ IYR (5%) 320 $62.65 $20, $0.22 $66.00 XLU (5%) 545 $36.75 $20, $0.04 $20.00 Cash (5%) 0 0 $20,400 Optionable Est. Monthly Portfolio Value $400, Cash Flow$ $1, Est. Annual $ $13, Est Annual % 3.46% This illustration of potential portfolio cash flow from a covered call option writing program is not based on an actual portfolio. Covered call option cash flow for any portfolio will vary depending on actual portfolio positions, option premiums received, individual stock price volatility, and general stock market volatility. Positions covered by call options may be called away, creating possibly unwanted capital gains or losses. Cash flow is not guaranteed over any period. More information may be found in CWP s Form ADV.

15 Solutions That Work

16 Practice vs Theory:

17 Investor Failure:

18 The Investment Experience

19 Why Volatility Selling Works

20 Volatility Strategies Compared

21 Case Study: DFA Portfolio

22 Case Study: Blue Chip Portfolio

23 Thank You. Questions?