The Buzz: The Chicago Board Options Exchange announced today the release and publication of a groundbreaking new study: "Highlights of Performance Analysis of Options-Based Equity Mutual Funds, CEFs, and ETFs." The study analyzed SEC-regulated investment companies (mutual funds, exchange traded funds (ETFs) and closed-end funds (CEFs)) that focus on use of exchange-listed options for portfolio management (options-based funds). The study analyzed the equal-weighted performance of a subset (nearly three-fourths) of the 119 options-based funds -- those that focus on use of U.S. stock index options and/or equity options -- during the 15-year period from 2000 through 2014.

Key Takeaways: The number of options-based funds is growing. Options-based funds averaged 4.2% total return over the 15-year period - tied with the S&P500 over the same period. The options-based funds had higher risk-adjusted returns (as measured by the Sharpe Ratio and Sortino Ratio) than the S&P 500 and S&P GSCI Indexes. The options-based funds had lower volatility and lower maximum drawdowns than the S&P 500 and S&P GSCI Indexes.

Listener Mail: Listener questions and comments

• Question from Alpha Numero. Happy 2015. It seems like we are looking somewhat top-heavy in the broad indices these days. I typically run portfolios as long equity - usually spy - with an OTM 1-2 month covered call - typically around 2.5%-3% out of the money. I often pair that with a farther 2-3 month OTM put - typically 5% OTM. In the current market would you recommend tightening up on that put - perhaps to around 2% OTM? This will undoubtedly result in a debit but I am ok with that if if preserves my portfolios. Would you also recommend tightening the covered call strike to reduce the net outlay on the position? What other strategies would you recommend for practitioners like myself who want to remain in the market but are concerned about near-term risk?
• Question from RVC10. Are there any special tax considerations I should consider before using options on behalf of my clients?
• Question from John D. Can you please explain the concept of risk premium as it applies to options trading and hedging?
• Question from JPK211. On several of your programs you mention that it is important to understand the VIX Cash level at a given SPX level. Can you please explain this further?

Tricks of the Trade: Short-duration contracts are all-the-rage in the options market these days. SPX Weeklys acounted for approximately 32% of overall SPX contract volume in 2014, up from approximately 23% the previous year.

Looking Back on 2014:

• Misperceptions from 2014 - Despite "low" VIX options, volume still strong in 2014. Vol/VIX was too cheap. OTM call buyers did well.
• Ukrainian crisis in Q1/Q2 and market volatility in October were two primary drivers this year.
• The ongoing oil meltdown as well.
• What option strategies worked in 2014? Put credit spreads and "Wheel of fun."
• Takeaways from 2014 - Do not get married to a single strategy.

Looking Ahead to 2015:

• Things to keep in mind - It might be time for a smart hedge. Volatility has volatility.
• Exchange fragmentation will continue.
• Expand your horizons.

Advisors Option 25: Mystery of the Covered Strangle

Options 101: Covered Strangles/Covered Combos

What is it? Long stock, covered call, short put. Why do it? To collect more income than a standard call or short put. Why not do it? Increased margin requirement, you will increase your stock position to the downside.

Note: Call and put should only be sold on strikes where you are comfortable buying/selling the stock.

Listener Mail Extravaganza

• Question from Neil Berg - Love the show. You have discussed financial advisors using options for income generation and risk management on previous episodes. Is that the only acceptable use case for advisors and their clients? What about the speculative usage of options? Do you feel it is suitable for advisors to utilize options for that purpose? If so, which strategies would you recommend?
• Question from Spartan16 - I have noticed that options tend to lose a substantial amount of value approaching long holiday weekends (Thanksgiving, Labor Day and others). Is this a known phenomenon in the markets, and is this something I can take advantage of as an income trader?
• Question from Allen B, Baton Rouge, LA - First - love the network. You fill my commute with knowledge. Second - I have just discovered advisors option and have been listening to the archived episodes. In an earlier episode the RCM representative - sorry, I do not remember the name - mention a triple income strategy. I understand the two income components of selling the put and selling the call, but what is the third income component to this strategy? Thank you again for so much great free education.
• Question from Michael Roberts - I came across your program while looking for new diversification options for my clients. I find your suggestions about collars and protective puts very interesting. I have also been reading new research about volatility itself being positioned as an alternative asset class. This leads me to two questions: 1. Do you agree that volatility is an asset class? 2. What is the best process to gain exposure to that asset class for my clients? Is simply buying an options with a substantial vega component sufficient, or must I purchase a dedicated volatility asset such as VIX options or an ETF life VXX?

It is all listener mail today on the Advisors Option, so let's dive in.

• Question from Luke Davis. Hi, I am wondering whether advisers are legally enabled to use any strategy that an individual might use in his own account. In other words, if I allow an adviser to invest a portion of my assets, may he use them for day trading, arbitrage strategies, etc.? I have heard of U.S. based un-registered advisers doing this for foreign clients, but refusing to do it for domestic clients, and am wondering if there is some compelling reason why they could not register and do so. Thanks
• Question from Frank. My advisor has expressed concern in the past over the time commitment and complexity that come with using options strategies. He says I am the only client who requests them so he would be spending an inordinate amount of time for just one account. What strategies would you suggest to minimize his time investment and make him more open to the possibility of using options? Thanks for this program.
• Question from Lucas Nuel. Got a question for Randy from Swan. He talked about buying two-year LEAP puts and then rolling them at the one-year mark. Why the two-year period? Would it be cheaper and perhaps more effective to use one-year LEAPS and perhaps rolling them when they hit the six or perhaps four-month period? That would save on the initial premium outlay but also avoid the rapid time decay period that occurs in the final few months of an options life. Can he talk a little more about the thought process that went into selecting the longer-term put vs shorter-term as well as the roll period.
• Question from Mitch76. Can you talk about the place that individual equity options should have in your portfolio vs. broad indexes. Judging from previous episodes it seems that the bulk of your focus is on indexes. Is that due to the volatility risk posed by individual names like APPL, NFLX, etc. Would an overlay or "holy grail collar" approach even be as effective in individual names vs. indexes or are they better suited to premium harvesting strategies like iron condors. Great program touching on a very underserved area of the options market.
• Question from Timothy Andrews, Spokane, WA. Can you talk about the influences of 60/40 tax treatment on your option strategies?
• Question from Neal Magny. Question for Advisors Option. What questions or topics would you like to see on any forthcoming options certification or test for for financial advisors? Trading? Regs? Bit of both? Thx.
• Question from TheInca. This may be a touchy subject, but it is important - What is an appropriate pay rate for option advisors? 2/20%? Some flat hourly rate? since they are doing more, should they get more? What should I look for when I am picking one of these guys?
• Question from J. Ingrisali. Hello everyone and thank you for your time. I would like to know what you consider to be an appropriate level of options involvement for a typical financial advisor. Should I just expect them to have a basic understanding of income and risk management - aka protective puts, covered calls and collars? Or should I expect them to facilitate my active trade mentality with strategies such as iron condors, butterflies, time spreads, etc. I guess what I am asking is how active should my advisor be with options? If I expect him to help me adjust and roll my positions, am I asking too much from a guy with dozens of other clients?

Options 101: Options on Futures as a Diversification Tool

Futures options strategies. Covered call & Protective puts both require underlying futures positions - Most advisors looking for diversification typically want bullish exposure to the underlying. Stock/Futures replacement strategies. Vertical call spread. Spreads with wings.

The Buzz: Commodity Trading Advisors bounce back to post positive performance in August. Following a tough month for returns in July, all managed futures indices calculated by Newedge reported positive performance in August. The strong month means that all Newedge managed futures indices are also now in positive territory for 2014 YTD.

Listener Mail: Listener questions and comments

• Question from Kevin Duggan. Regarding no cost collars with long put LEAPS and short term call writes. How do you manage them when the stock drops? Then the calls. I want to write have little premium since they're now way OTM and, I don't want to lock in a loss by getting assigned at a lower strike than I paid for the stock. So a question for Randy since he has a lot of experience in this area: When it becomes apparent that my client won't be able to recover the premium paid for the put, how do I manage/close the collar without a loss? Details please (fry my brain, I can take it!). Also, the lure of "no cost insurance" gets me the meeting, how do I explain the worst case scenario and still get the order? Thanks.
• Question from Alan Charles. I am a client of Wells Fargo. After listening to your show, I decided to check out Well Fargo's options offerings. This particular paragraph caught my eye: "Please note: Although options can be used to hedge an existing investment, options can also expose you to potentially significant risks. An investor who purchases options may lose the entire amount committed to the options in a relatively short period of time."I understand that they have to include disclaimer material, but does that seem like they are essentially saying "do not use these products at any cost."What is your view of Wells Fargo? Are they an options friendly shop or should I take my business elsewhere? Great show! Great network! Nothing else like it on the dial.
• Question from Sea Biscuit. Hey guys! Digging the Advisors Option program. Just discovered it while listening to Options Boot Camp through you mobile app for android. I heard you guys mention extrinsic value on an early show. I am still not clear on the difference between extrinsic and intrinsic value. I know intrinsic changes with the value of the underlying, but what about extrinsic? Does that also change with the underlying, or can it move without it?
• Question from Christian. If you buy an option on a company that ends up merging or being bought out with another, what happens to the option you own?
• Question from Ingraham. Question from the OIC boys Eric and Alan G - You guys travel the world talking to advisors about options. Which firms do you feel are the most options-centric?
• Question from C. Dutney, Ithaca, NY. How do I find an advisor in my area who is skilled in the topics that you discuss on your program? Is there some database I can access? Does Mr. Swan's firm take individual clients from my area? My account size is in the low six figures.
• Question from Cat. I want to set up an options trading account for my son (who is 23 years old) and I want him to learn to trade options in a risk-managed way - I do not really want him to know that he can use options for taking stupid risks (he will probably figure that out on his own soon enough). I contacted the customer services people at Firm X to see how an account could be set up to achieve my goals and was told that initially all he could do would be to buy puts and buy calls. Seriously? That's exactly what I do not want him to do. I want him to control his risks better than that and to learn to put on spreads from the get go. Is there any way that my goal can be accomplished?

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.

In this episode, Mark and Randy are joined by Joe Cusick, Vice President of Wealth and Asset Management at MoneyBlock.

Options 101: "Low VIX" is all over the financial media these days. Which makes it an excellent time to review the relationship between volatility & options. Haven't discussed volatility on the program since Feb 2013 and the VIX products since October 2013 so we'll review the following topics:

• What is implied volatility?
• Difference between realized and implied volatility?
• How does high and low implied volatility impact options pricing?
• If you trade options for your clients do you want high or low volatility?
• What does it mean to have a "low VIX"? Is this level of implied volatility actually low?
• Should advisors use VIX options to hedge their client's portfolios?

The Buzz: Credit unions help advisers expand use of options:

Listener Mail: Listener questions and comments

• Question from Charlie Durant. I love the advisors show. Can you guys recommend a good tool or platform that will help me roll covered calls on my spy and individual equity positions more effectively? Right now I’m pretty much running a spreadsheet for my clients and then manually trading in and out of each position. Seems like there should be a better or easier way.
• Question from Firestar. Can I use VIX options in my IRA accounts or are futures options banned due to leverage?

The Buzz: News out of China: OIC, Shanghai Stock Exchange content licensing agreement. Pensions seek bond diversification. Report: UK pensions miss out on returns. Chuck likes index funds. Retail investors not afraid of equity markets. Low VIX: what does it mean for volatility?

Listener Mail: Your comments and questions

• Question from Neil Staffenberg: thank you for this program. It is very informative. I've heard you mention SMAs on this program in the past. I'm not familiar with this term. Can you explain what you are referring to and the significance it has for the advisor community.
• Question from Avow: what do the hosts think of recent claims from advisor-centric firms like Charles Schwab that the market is rigged against individual investors? Should I be instructing my advisor to move me to cash? Is purchasing a put sufficient protection to my broad portfolio or are the options market rigged against me as well?
• Question from Tim Nichols, Fredericksburg, VA: can you provide an overview of the CBOE put write index. The BXM has been discussed widely but I haven't come across much discussion or analysis on this sister product. From all the research I've encountered the product appears to perform quite well. It seems that structured products that include automation are the preferred tools for many financial advisors and planners. Would the panel recommend the put write index as a viable alternative for advisors looking to add options to their portfolio without the hassle of writing the options themselves?

The Buzz: An overview of the upcoming Options Industry Conference. What topics are discussed at the conference? Who attends? Is there any benefit for advisors?

Listener Mail Extravaganza: The Advisors Options mail bag is filling up, so we are going to tackle as many as possible this episode:

• Question from Neal Santos. I am in the market for a new advisor and your program has awakened me to the benefits of using options. What sort of licensing should I look for in an advisor to make sure he is qualified to handle options investments? Is there a specific options exam offered by the exchanges or perhaps OCC that I should look for? Thanks for the show.
• Question from J. Andrews, Philadelphia, PA. I have multiple clients with retirement assets in broad based equity portfolios. I have already done the correlation work and calculated how many SPX and SPY puts it would require to both fully and partially hedge the positions. My initial thought is to utilize SPX contracts as the larger size will reduce the number of contracts and reduce the overall commissions. But I have serious concerns regarding slippage in the SPX. I fear that over the long-term the dramatic difference in the bid-ask spread of the two products will result in lower returns for my clients in the SPX. One or two bad fills is all it would take to wipe out several years' worth of commission savings. Are these fears warranted?
• Question from Darren. Hi, does OIC have any option alert services? Thanks and I truly enjoy the program.
• Question from Andrea Tillwell. I would be interested in crafting a custom overlay to my retirement portfolio. Does Swan offer a bespoke service to individual investors or only to institutions?
• Question from Hudson Trader. I am starting a new RIA with a focus on covered calls. What firms do the best job handling options focused funds - tools, understanding, etc?
• Question from A_Firm. My clients are pushing for more commodity and volatility exposure in their portfolios. I am comfortable with options but have not traded many futures, so I am looking at ETF options, particularly SLV, GLD, VXX, USO and UNG. What is your view on these products from an options perspective? Do they offer suitable depth and liquidity for clients looking for commodity exposure?
• Question from TBard. You have discussed leveraged ETFs in the past but have not touched on structured products. This to me is the more interesting of the two product categories for a busy advisor or asset manager. Many of my peers use fee-based products that replicate protective put strategies. I have several clients in funds linked the BXM and am taking a long look at PUT. Since you've complained about lack of options tools and awareness on the part of major BDs in the past perhaps these products are the necessary half step. The goldilocks porridge of options products for advisors.