MarketsMuse Editor Note: This is a late post; the original article was published Mar 21. Given the use of options as a means to enhance returns for pension funds has remained ridiculously under-explored by fiduciaries since listed options were introduced 4 decades ago, now that public pension plans are struggling, perhaps Sacramento will prove to be a pioneer.
For the past 18 months, the City of Sacramento has been writing covered calls and buying the occasional put. It trades options primarily to enhance its yield, but also to preserve principal.
John Colville is the city’s portfolio manager. “A big objective of our portfolio is fixed-income interest and dividend payments,” Colville explained. “We needed to augment that. And you can’t do it in bonds or the stock market.”
Colville manages about $300 million of the city’s $2 billion in pension assets. Of that, about $135 million is invested in equities. The rest is comprised of fixed-income securities.
Of that $135 million in equities, Colville writes calls against $70 million to $90 million during any given month. He uses a mixture of options on indexes, exchange-traded funds, and individual stocks.
The decision to incorporate options into his investment strategy was not taken lightly. Most pension plans abhor options because they are not well understood and conjure up images of gambling. But a yawning gap between the plan’s assets and liabilities gave Colville’s investment board the courage it needed to take the plunge.
Based on data provided by Colville, in the 18 months from July 2011 to December 2012, Sacramento’s options program proved successful. The yield in its large portfolio jumped 50 percent, from 2 percent to 3.2 percent, as a result. The yield on its international portfolio more than doubled to 4.8 percent More…
Refreshing Market Commentary courtesy of Ron Quigley, Mgn.Dir./Head of U.S. Syndicate Desk & Primary Sales for Mischler Financial Group.
With Washington in full-out gridlock, Americans should be turning to the best national news, namely corporate profits. Corporations are driving the resurgence in equity markets posting overall fabulous earnings. The flight to under-owned equities has also helped the DOW reach what today represented a new all-time high when it screamed past the previous record high of 14,164 set back on October 9, 2007 at the open. The DOW closed today’s session at 14,253 or 89 points above its previous record. The S&P meanwhile, is closing in on its all-time high of 1,565 also set on October 9, 2007, sitting a mere 26 points away ending the session at 1,539.
Today’s pair of economic data releases conveyed a mix message about the shape of the U.S.A. On one hand, the Institute for Supply Management’s (ISM) Non-Manufacturing Business Survey painted a bright picture indicating that segment of the nation’s economic activity grew for the 38th consecutive month. It was the highest such reading since the 56.1 registered in February of 2012. Construction is showing some signs of improvement as are financial and insurance companies among others. However, in the push-me/pull-you that characterizes much of the data we see, today’s Economic Optimism Index dipped by 5.1 points versus the prior while remaining over 5 points behind its annual average. Readings above 50 point to optimism, below it – pessimism. The Index is comprised of three component parts namely, a six-month economic outlook, a personal financial outlook and confidence in federal economic policies. All three categories posted declines. This month 60% of respondents indicate they believe the economy is in a recession.
So there it is…..more contradictory information to make our day a little brighter. Heck, my barometer of optimism is if I get all my work done in one day, can start from a clean slate the next and read a bed-time story to my six year-old daughter well then, things are looking good.
On another note, Hugo Chavez is dead and you all know what that means……..you can now go ahead and buy gas at your local Citgo station. Pleasant driving people!
Here a re-cap of today’s economic data releases: More…
ALPS Portfolio Solutions has launched a new exchange traded fund that provides investors with income through selling put options on the largest U.S. stocks with the highest volatility.
The U.S. Equity High Volatility Put Write Index Fund (NYSEArca: HVPW) tries to reflect the performance of the NYSE Arca U.S. Equity High Volatility Put Write Index, which tracks a portfolio of exchange-traded put options on the largest capitalized stocks that have listed options with the highest volatility, according to ALPS. HVPW has a 0.95% expense ratio.
The ETF will sell 60 day listed put options every two months on 20 stocks. HVPW will also distribute out 1.5% of the ETF’s net assets at the end of each 60 days.
Rich Investment Solutions, LLC is the subadvisor to the ETF, which was launched under the ALPS ETF platform.
Kevin Rich of Rich Investment Solutions in a telephone interview said the ETF sells puts that are 15% “out of the money.” The fund tries to earn income through the options premiums. The ETF should do well when markets are trending higher or sideways, but could underperform in strong rallies and sell-offs. “It’s definitely an income strategy,” Rich explained. More…
Courtesy of Jeff Sommer, New York Times
THE economy may be lurching into another crisis, but you wouldn’t know it from the stock market, where an epic party is under way.
Yet this effervescence belies some ominous developments in politics and the economy. After the State of the Union address by President Obama on Tuesday — and the negative reaction to it among many Republicans in Congress — it seemed quite possible that $1.2 trillion in automatic government spending cuts might begin in just a few weeks, delivering yet another blow to an already lackluster economy. Most economists had expected minimal growth this year, even without a new shock from Washington — or from Europe or anywhere else.
These apparently conflicting pictures pose a quandary for market strategists. Which signals should an investor emphasize: the signs of disharmony in Washington and the negative indicators for the economy, or the upward trend of the stock market?
For Laszlo Birinyi, the veteran strategist and longtime market bull, the contest isn’t close. He says he starts by assuming that the market is smarter than any analyst. “We focus on the market itself, on what it is actually telling us,” he said.
In September 2009, when very few strategists were overtly bullish, Mr. Birinyi, president of Birinyi Associates, the stock market research firm in Westport, Conn., told me that we were in the early stages of a classic bull market. That analysis was prescient. The S.& P. 500 has returned more than 50 percent since then.
In a conversation last week, he said we were More…
Courtesy of Brad Zigler. This article first appeared in the February 2013 issue of REP/WealthManagement.com.
In 2013, the market for alternative investment exchange-traded products seems to revolve around one word. That word is “hedge.” Judging by their proportion of regulatory filings and launches last quarter, product sponsors are keen on risk-controlled equity and bond plays.
No surprise there, really. After all, we’re just emerging from one of the most volatile periods in market history. Investors – and their advisors – are still a little dizzy after being buffeted by the frets of an impending “fiscal cliff,” a meltdown of the eurozone, further ballooning of the federal deficit and fears of potential asset bubbles.
Overall, the prospects for 2013 are mixed at best. Stocks, while not the raging bargains they were during the recent recession, may still be attractively priced, but their dynamics have changed. The recent equity rebound has largely been market driven. Value plays, starting in early 2009 as corporate profits widened, are now becoming sparse. Currently, the market is reacting more to political influences such as Fed policy and the deficit debate, causing some pundits to forecast an even riskier environment ahead. With such prospects, they say, a little hedging and bond buying seems prudent. Exchange-traded product manufacturers are happy to oblige.
Funds and notes geared to dampen market volatility have proliferated in the wake of the 2008-2009 crash. Some have enjoyed extraordinary success attracting assets. Witness, for example, the Invesco PowerShares S&P 500 Low Volatility Portfolio (SPLV), which has pulled in more than $3 billion since its May 2011 debut. SPLV is essentially a passive hedge. The fund mirrors a 100-stock portfolio, carved from the S&P 500 Index, representing issues with the lowest 12-month trailing volatility.
Invesco now offers investors a more sophisticated approach to managing volatility with its December 2012 launch of the PowerShares S&P 500 Downside Hedged Portfolio (PHDG). Like SPLV, the new PowerShares fund invests in U.S. stocks but hedges downside risk through futures contracts linked to that well-known “fear gauge,” the CBOE Volatility Index (VIX). More…
Credit Suisse on Tuesday launched its Credit Suisse Gold Shares Covered Call ETN (NasdaqGM: GLDI), a strategy that provides long exposure to physical gold coupled with an overlay of call options.
The ETN, comes with an annual expense ratio of 0.65 percent, will have notional exposure to the bullion ETF SPDR Gold Shares (NYSEArca: GLD) while notionally selling monthly “out of the money” call options, the fund’s prospectus said.
The strategy is designed to enhance current cash flow through premiums on the sale of the call options. Those premiums will be received monthly in exchange for giving up any gains beyond 3 percent a month. In other words, the premiums would soften the blow if GLD were to face a sell-off, but that’s the extent of the fund’s downside protection.
There’s still growing uncertainty in the market on whether the 12-year-long gold rally has run its course, which makes Credit Suisse’s launch of GLDI timely, as the ETN represents a somewhat neutral view on gold.
ETNs are senior unsecured obligations; in this case, of Credit Suisse’s Nassau branch. Unlike ETFs, they have no tracking error, but, also unlike ETFs, they represent a credit risk. For example, if Credit Suisse ever faced bankruptcy, holders of GLDI would likely lose their entire investment.
CBOE Holdings, buoyed by the phenomenal success of options and futures contracts based on its Volatility Index, is ratcheting up its efforts to broaden their appeal.
“The volatility business is only eight years old, but we see terrific growth,” Ed Tilly, CBOE’s president and chief operating officer, told a gathering of reporters in New York recently. “We see hedge funds, prop trading firms, (commodity trading advisors), insurance companies and other institutional users migrating to the product. It’s very important for us.”
As part of its marketing, CBOE is emphasizing to money managers and traders the growth of liquidity in the instruments and the attractiveness of adding a volatility component to their portfolios.
The exchange operator also plans to provide European institutions with direct access to CBOE matching engines, 24 hours a day, 5 days a week.
The Volatility Index, or VIX, is a measure of the market’s expectation of stock market swings over the next 30 days, as determined by the performance of options on the Standard & Poor’s 500 Index. Trading in both contracts has soared in the past three years, with growth in the futures product especially dramatic.
Last year, average daily volume in VIX futures—traded at the CBOE Futures Exchange—reached 95,000 contracts, up from 5,000 in 2009. Average daily volume in VIX options—traded at the Chicago Board Options Exchange— reached 443,000 contracts, up from 132,000 in 2009. All this while overall options volume fell in 2012 and volatility itself was relatively muted. More…
Uncertainty around the elections, low volatility and anemic volumes in the equity markets drove the first year-over-year decline in options trading volume since 2002. But bright spots such as weekly and mini options portend a stronger 2013.
Despite the options market doldrums in 2012, TABB Group believes the volume retreat is a temporary phenomenon, especially when compared to trading activity in the “abnormal” market environment of 2011. The use of US-listed options by institutional investors remains in its infancy, and their adoption will only expand in the future. Latent demand from institutional investors that are just beginning to explore the role of equity options as a part of their portfolio strategies will drive volume in 2013 and beyond.
Weekly options will continue to expand their footprint in 2013 , and the pending March launch of mini options is also expected to drive volumes into 2013, especially from smaller retail accounts that have been largely absent from the options market in recent years. After initially launching for a handful of high-priced stocks, exchanges can be expected to quickly expand the list of names in the program. Trading interest from retail accounts will attract the interest of institutional accounts, especially accounts using relative value and quantitative strategies.
To read the full article from TABB Group, please click here
AdvisorShares, a leading sponsor of 17 actively managed exchange-traded funds (ETFs), announced today that the AdvisorShares Peritus High Yield ETF (NYSE Arca: HYLD), the first high yield actively-managed ETF has met listing requirements of the Chicago Board Options Exchange® (CBOE®) and that HYLD options are now listed for trading on the CBOE.