July 31, 2014

Advisors Option 21: Options for Protecting Profits

1 hour 3 minutes

Options 101: Many clients are sitting on gains in their portfolios right now and are rightfully concerned about protecting them. Selling the assets with gains is a sure bet but eliminates future upside potential. This is an ideal use case for options.

Basic hedging strategies:

Protective put: the basic defensive play.

Put spread: ideal for protecting gains due to limited outlay.

Collar: the holy grail of options positions for advisors.

Ratio spreads/back spreads: ratios are tempting but can add risk to a portfolio. Back spreads may be more appropriate for some experienced.

Hedging an individual asset is relatively straightforward: simply implement the hedging strategy in the product you want to protect.

Hedging a broad portfolio is a little more difficult and requires determining the beta of the portfolio and the appropriate number of shares of the index product to hedge as result. Any tools or platform recommendations to assist with this process?

Listener Mail: Listener questions and comments

Question from Tyler Madison: I'm studying to become a CFA in Virginia. Your program has been tremendously helpful in preparing me for any options components of the exam. It has also armed me with potential options strategies to use for my clients. Thank you for this great content. You could really charge for this. If I may, I'd like to ask a question about open interest. I see this mentioned quite frequently by options analysts. What impact does open interest play in the options market - does an option with high open interest behave differently than an option with low open interest? Is this something I should pay attention to when trading options for my clients or is this not important? Thanks again for all of your insight - Tyler.

Question from J. Schaw, Ontario: Can the advisors options hosts recommend any good listed products that generate options income? I like the strategies you discuss on the show but simply don’t have time to manage all the strikes and such for my people. Available in Canada is obviously a big plus for me.

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