Paul Baiocchi,
Moderator
ETF Analyst, IndexUniverse
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
ETF Options
Strategies:
Keeping Your
Options Open
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
Jeffrey Wycoff
Panelist
Managing Partner
Fort Point Capital
Michael Lally
Panelist
Regional Sales Director
Capital Wealth Planning LLC
The Current State of the ETF Options
Market
ETF option market size & breadth:
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 $6bn notional traded per day in the remainder
of liquid ETF options
0 10 20 30 40 50 60 70 Q1-99 Q4-99 Q3-00 Q2-01 Q1-02 Q4-02 Q3-03 Q2-04 Q1-05 Q4-05 Q3-06 Q2-07 Q1-08 Q4-08 Q3-09 Q2-10 Q1-11 Q4-11 Q3-12 Median no tio nal volum e ($bn )
SPY IWM QQQ GLD Other
75% 11% 10% 4% Equity $4,416mn Debt $671mn Commodity $620mn Currency $208mn Excluded: SPY $26,296mn IWM $3,392mn GLD $2,433mn QQQ $2,235mn
Median daily ETF option notional volume per quarter
Source: BofA Merrill Lynch Global Research. Data through 7 Sep 2012
Applications and trades with ETF options:
80 90 100 110 120 130 140 150Dec
-10
Feb
-11
Ap
r-11
Jun-11
Au
g-11
Oct-11
Dec
-11
Feb
-12
Ap
r-12
Jun-12
Au
g-12
Underlying of GLD
TRADE 1: A put spread hedge on GLD to reduce risk in
being long gold
Gold prices whipsawed in 2011
Applications and trades with ETF options:
0
500
1000
1500
2000
2500
3000
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Total
return
Treas
ury investment
0%
2%
4%
6%
8%
10%
12%
14%
16%
30-yea
r Treas
ury Yield
30-year Treasury futures TR
30-year Treasury yield
TRADE 2: Put options on TLT to hedge a rise in US Treasury
yields
US TSY yields near multi-decade lows
Applications and trades with ETF options:
1.15 1.20 1.25 1.30 1.35 1.40 1.45 1.50 1.55 1.60Dec
-10
Feb-11
Ap
r-11
Jun-11
Au
g-11
Oc
t-11
Dec
-11
Feb-12
Ap
r-12
Jun-12
Au
g-12
Euro/USD spot rate
TRADE 3: Long FXE call options
EUR/USD spot rate declining
Iron condors on GLD for alpha:
70 75 80 85 90 95 100 105 110 115 120Jun-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
GLD Iron Condor HFRI Fund Weighted Composite
Options generally trade rich due to a risk premium that accounts for
unexpected increases in volatility
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)
Hypothetical P&L of a GLD short iron condor
A 1M 88/96 106/114 short iron condor strategy on GLD
-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 %-age P& L Short I ron Con dor
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
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
Simple Covered Call Income Analysis:
Purchase
Strike
Option
Symbol
Shares
Price
Value
Price
Price
Cash Flow
20-Jun
07/21/12
SPY (40%) 1180 $135.50 $159,890.00 141 $0.38 $418.00 SH (15%) 1635 $36.70 $60,004.50 39 $0.20 $320.00 LQD (10%) 340 $116.90 $39,746.00 0 $0.00 $0.00 MDY (10%) 235 $170.70 $40,114.50 182 $0.30 $60.00 IWM (10%) 505 $78.75 $39,768.75 82 $0.40 $200.00 IYR (5%) 320 $62.65 $20,048.00 65 $0.22 $66.00 XLU (5%) 545 $36.75 $20,028.75 38 $0.04 $20.00 Cash (5%) 0 0 $20,400
Optionable Est. Monthly
Portfolio
Value $400,000.00 Cash Flow$
$1,064.00 Est. Annual $ $13,832.00 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.
