Coffee With Cott is a blog from The Options Industry Council's Financial Advisor Division. Eric Cott, the author, is a former advisor who has been the Director of Financial Advisor Education at the OIC since he developed the organization's outreach program in 2009. Coffee With Cott offers percolating insight on options strategies, as well as practice management ideas.
On what seems like a daily basis, I'm reminded of the potential power of a well-planned strategy that incorporates options - and at the same time how options can differentiate an advisor.
Business news headlines are regularly filled with questions about whether the U.S. is heading toward a recession, a debate about the possibility of a "bubble" in passive investing strategies, and more recently news about zero commissions at the retail brokerage firms. It's a lot for advisors and their clients to take in, and it can't be ignored any more than the jolt you can get from a triple espresso can be. So, if any or all of these themes are weighing on your clients, the listed equity options market may be able to help lessen the stress for them.
I spend a significant amount of time on the road, attending conferences and talking to advisors from coast to coast. All along the way, I run into financial advisors and RIAs who are skeptical about options, who think they're too complicated or who just don't believe they have the time to learn about these versatile assets. Having spent nearly two decades as an advisor myself, I understand. But for the last 10 years, I've been with The Options Industry Council, which offers unbiased education about the benefits and risks of listed options.
Options aren't necessarily going to be right for every client or every situation, but in my view they often deserve consideration, especially for managing risk or generating income. Let's look a little closer at how they might be incorporated to the portfolios you oversee, and how they can help you, the advisor, possibly provide another tool for your clients.
Addressing Concerns with Action
Suppose a client calls to say they're worried the economy is weakening. Or maybe they own a broad-market ETF as one component of their holdings, and they heard something in the business news about a potential bubble in passive strategies. Basically, they've got jitters like they just downed a whole pot of coffee, and now they want to know what you're planning to do. Clearly, you're trained to help them calmly navigate any turbulence, but this could be the time to explore options - listed equity options, to be precise.
- For clients concerned about a downturn, they could consider a protective put strategy. A protective put is usually described as similar to an insurance policy. It can set a minimum price where a client would sell their underlying position.
- What if a client thinks their ETF is peaking, and they may be ready to let it go? Here, it may be time to consider a covered call. With a covered call, the client collects income from selling the call. If the ETF rises beyond the exercise price, the client would probably have their underlying position called away, but they would keep the income generated from the sale of the call.
- A combination of these two ideas is the collar. With a collar, an investor buys a put and also sell a call on the ETF already owned. In this situation, the client gets income immediately, establishes an exit price on the upside, and also has a downside buffer.
One of the main purposes of options can be to serve as a risk management tool, and they can be employed on even small portfolios.
Now, what about the moves to zero commissions we've been seeing? It's safe to say plenty of investors will find this idea enticing. However, for the trusted financial advisor or RIA, I believe it can be an opportunity. You do what you do to attempt to be a voice of reason and knowledge about not only the daily markets, but about overall financial plans. That means you can put your planning expertise to use with a blend of assets that clients might not have even considered. Options could be among them.
Turning on the Lights
You and your clients don't have to be caught off guard by the news headlines. Options can provide alternative mechanisms to manage unforeseen risk. Email me any time at email@example.com or contact my or check out the Advisor Center for practice management ideas.
Learning about Options doesn't have to be hard. It takes some effort, but if you have an interest, why not review options a little further on optionseducation.org?
If you're going to be at Impact 2019 in San Diego in November or the Barron's Women Summit in Palm Beach, Fla., in December, let me know. Let's get a coffee and talk options. You may leave our conversation with a whole new set of ideas to take back to the office.
Do you have a topic you want to see covered in the Coffee With Cott blog? Let us know by writing to firstname.lastname@example.org. We want to hear from advisors like you with all your questions on options.
Options involve risks and are not suitable for everyone. Individuals should not enter into options transactions until they have read and understood the risk disclosure document, Characteristics and Risks of Standardized Options, available by visiting OptionsEducation.org or by contacting your broker, any exchange on which options are traded, or The Options Clearing Corporation at 125 S. Franklin St., #1200, Chicago, IL 60606.
In order to simplify the calculations used in the examples in these materials, commissions, fees, margin, interest and taxes have not been included. These costs will impact the outcome of any stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences.
Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes and should not be construed as an endorsement, recommendation, or solicitation to buy or sell securities. Past performance is not a guarantee of future results.
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