Recent losses in the stock market, combined with declines in traditional safe-haven assets, may make options strategies attractive to investors seeking portfolio income and protection. Investors are facing escalating wars in the Middle East and soaring oil and gas prices. On Thursday, Brent crude oil futures briefly exceeded $119 per barrel, and the Dow Jones Industrial Average fell about 400 points in afternoon trading before recovering. Even gold wasn’t spared, as spot prices fell more than 4% on Thursday. For investors struggling to navigate these volatile times, options can complement a diversified portfolio and provide some income in a turbulent market, said Ashton Lawrence, a certified financial planner and senior wealth advisor at Mariner Wealth Advisors in Greenville, South Carolina. “When it comes to options, it depends on where you are in life and what you’re looking for.” Here are some of his favorite strategies during these turbulent times. Cash-Backed Puts Some investors may have large amounts of cash sitting around and are concerned about reintroducing funds into a declining market. This is especially true for those nearing retirement. “They have a sense of, ‘Okay, I have all this cash, but I don’t necessarily feel like investing in stocks at this point,'” Lawrence said. A put option gives an investor the right to sell at a set price (known as the strike price) before a specific date. With a cash-backed put, an investor writes a put option and keeps enough cash on hand to buy the stock in case the put is exercised. In this way, investors collect income from option premiums and yield from money market funds holding cash. “It depends on what you buy,” Lawrence says. “Some people are hesitant about individual stocks, but broad market exposure is possible.” For example, this might involve using the State Street SPDR S&P 500 Trust ETF (SPY) and tying options to that fund. Please note that there is no free lunch. One of the risks for investors using this strategy is that if the stock price drops sharply below the strike price and the put is exercised, they still have to buy the stock at a higher price. Covered Calls Call options allow investors to purchase an asset at a specific strike price before expiration. A covered call involves selling an investor a call option on an asset they already own. You can get a premium by writing an option, but you must be prepared to let go of the stock if the call is exercised. This means that if the stock happens to rise, you could miss out on a significant increase. Lawrence uses covered calls on value stocks, as recent sector rotations have moved away from tech stocks. “It’s a double whammy for income investors because they can collect not only dividends from value names but also option income,” he said. As always, investors should work with their financial advisor to determine whether an options strategy can complement their long-term goals and risk appetite.
