Buying defensively using options
John Nicola and the investment team at Vancouverbased Nicola Wealth Management aren’t convinced the sideways trend for equity markets is over.
As a result, Nicola and portfolio manager Sean Oye continue to use options strategies for much of the NWM Tactical High Income Fund.
“We buy companies we want to own for the long term, then use calls and puts to be more defensive about how we own them,” Nicola said.
For example, if the managers wanted to increase their position in Microsoft Corp., they could buy the stock at roughly US$ 28.50 today. By employing a covered- call strategy, whereby someone pays them $ 1 for the right to buy those Microsoft shares in six months at US$ 30 each, they can get a return of about 3.3%.
The managers would also collec t Microsoft ’ s 3%- plus dividend yield, as well as a capital gain of US$ 1.50, for a total return of about 10% over six months.
“We’re being more conservative when we do that: We give up some upside and protect some of the downside,” Nicola said. “This is a way to participate without having the same naked exposure to the volatility in the marketplace.”
He added that while a putandcall- writing strategy for the S& P 500 may underperform in bull markets, it has historically outperformed in sideways and bear markets.
In addition to the mid- and large- cap names that make up the majority of the fund’s equity exposure, more than half of the portfolio is in high- yield bonds and cash.