Put Upside Volatility on the Wanted List?Advice to the Advisor
Far from doing everything possible to avoid volatility, downside volatility is the only type to avoid. We should all want portfolios that have higher levels of upside volatility, Craig Israelson asserts. Traditionally, one advantage of building a broadly diversified portfolio is reduced volatility of returns. When higher standard deviation results in impressive upside performance, that is hardly something to be upset about, he observes.
Well worth explaining to clients, the SPDR S&P 500 (NYSE symbol SPY) is the most widely traded contract on option exchanges. The SPY provides a vehicle for building a broadly diversified portfolio, because underlying the SPY contract is the Exchange Traded Fund, which is in turn based on the 500 stocks composing the S&P 500 Index. What may be the aspect less familiar to investors is that SPYs allow them the opportunity to take advantage of upside volatility along with that diversification.
Sheaff Brock Managing Director Dave Gilreath has an interesting observation about the term “volatility.” Ever since Harry Markowitz published his 1952 paper on Modern Portfolio Theory, he believes, investors have thought of the two words “volatility” and “risk” as being synonymous. They are not, he stresses; in fact, they are two totally different things. Since the early 90s, Gilreath explains, analysts have measured market volatility by the VIX, a 30-day, forward-looking measure of the volatility in the S&P 500 stock index as determined by option premiums.
For advisors, (and in keeping with the Israelson concept) Sheaff Brock offers two opportunities to expose clients to the potential of higher upside performance by utilizing the market’s volatility:
- The Sheaff Brock Index Income Overlay portfolio is a long-term, bullish play on stock investing using the SPDR S&P 500 ETF. This strategy makes use of put credit-spread selling, using an existing portfolio as collateral for the options account. It is intended to capture long-term time premium by leveraging market-diversified risk over an underlying portfolio.
- The Sheaff Brock Covered Call Income strategy invests in a diverse portfolio of high-quality stocks and writes/sells short-term out-of-the-money call options. The overall aim is to generate consistent income in the form of call option premium in addition to the capital appreciation of the underlying high-quality stocks.
As the Options Industry Council (OIC) explains its own goal, it is to “provide a financially sound and efficient marketplace where investors can hedge investment risk and find new opportunities for profiting from market participation.” And as Sheaff Brock Director Jim Murphy explains one of the Sheaff Brock firm’s goals on behalf of its clients, it is helping them take advantage of upside volatility!