Using options in equity portfolio management
Options are a financial instrument that can be considered whenever equity fund managers seek to:
- Generate extra returns: by writing options and collecting premium income when your market view is that you are happy to cap upside.
- Reduce risk: by buying put options as insurance, or by writing premium income which cushions downside price moves.
- Reduce transactions costs: by gaining exposure to stocks or an index using options, rather than paying full stock transactions costs.
- Reduce market impact costs of acquiring stock: by accumulating exposure via options, and then selling those options when the required stock weight has been reached.
- Capital gains implications: because you can effectively sell stock by selling call options, capital gains implications can be managed.
The diagram bellow demonstrates how equity portfolio managers can expand the range of portfolio outcomes by using various options strategies.
The yellow (centre) choices of neutral, long or short stock can be augmented by a range of strategies that enhance yield (blue circles) and that protect the portfolio (red circles).