Solutions
Bond Income Enhancement Solution
Allocate part of your bond portfolio to a put-option premium selling strategy
Target a higher income yield when the risk-return profile is attractive
The Concept
One of the biggest challenges facing investors of retirement age, with typically bond heavy portfolios, is the current low yields that bonds provide. In addition, heavily weighted bond portfolios are subject to significant risk of capital loss in the event of a transition to a rising interest rate environment.
By selling put-option premium on pre-qualified, dividend paying, value stocks that meet our strict risk-return criteria, there is an opportunity to generate higher income than your bond portfolio from time-to-time.
By selling put option premium on a stock, you are collecting a premium upfront, in exchange for agreeing to buy the stock at some agreed upon strike price, usually lower than the current price, in the future, typically 6-9 month in our case. If the stock does not go below the agreed price within the term agreed, you get to keep the premium and the trade is over. If the stock price goes below the agreed strike price, then you are required to buy the stock from the person who bought the insurance from you. The higher return available from selling premium comes with the risk that the stock price falls below the agreed strike price. For this reason, you only want to sell insurance on stocks that you are willing to own and hold for the long term, and which have an historically stable dividend yield which at least matches your previous bond yield.
One of the biggest challenges facing investors of retirement age, with typically bond heavy portfolios, is the current low yields that bonds provide. In addition, heavily weighted bond portfolios are subject to significant risk of capital loss in the event of a transition to a rising interest rate environment.
By selling put-option premium on pre-qualified, dividend paying, value stocks that meet our strict risk-return criteria, there is an opportunity to generate higher income than your bond portfolio from time-to-time.
By selling put option premium on a stock, you are collecting a premium upfront, in exchange for agreeing to buy the stock at some agreed upon strike price, usually lower than the current price, in the future, typically 6-9 month in our case. If the stock does not go below the agreed price within the term agreed, you get to keep the premium and the trade is over. If the stock price goes below the agreed strike price, then you are required to buy the stock from the person who bought the insurance from you. The higher return available from selling premium comes with the risk that the stock price falls below the agreed strike price. For this reason, you only want to sell insurance on stocks that you are willing to own and hold for the long term, and which have an historically stable dividend yield which at least matches your previous bond yield.
What We Do
We have created a set of rules or conditions under which it makes sense to re-allocate capital from a bond portfolio into the put-write solution. The rules specify the type of companies we can utilize for this solution, the excess return premium we require over current bond yields, the discount we require if we are to own the stock, and the eventual dividend yield we will receive if we end up owning the stock.
We pre-qualify a set of companies that are suitable for this strategy and monitor the market on a daily basis to determine whether any opportunities exist that meet our criteria.
We will offer this solution in two formats. One is a turn-key solution where we implement and manage the entire trade process in your own separately managed account - we do not take custody of your funds. The second is in the form of a subscription newsletter for self-directed investors who prefer to handle the process themselves.
We have created a set of rules or conditions under which it makes sense to re-allocate capital from a bond portfolio into the put-write solution. The rules specify the type of companies we can utilize for this solution, the excess return premium we require over current bond yields, the discount we require if we are to own the stock, and the eventual dividend yield we will receive if we end up owning the stock.
We pre-qualify a set of companies that are suitable for this strategy and monitor the market on a daily basis to determine whether any opportunities exist that meet our criteria.
We will offer this solution in two formats. One is a turn-key solution where we implement and manage the entire trade process in your own separately managed account - we do not take custody of your funds. The second is in the form of a subscription newsletter for self-directed investors who prefer to handle the process themselves.
What You Get
If no opportunities present themselves, you get what you had before, which was your basic bond fund and yield.
If opportunities present themselves, then you end up with either 1) a higher return than you would have had of approximately 4% on the capital allocated, or 2) if the trade goes against us, then you end up owning the stock at a discount from today’s price of approximately 15% and with a yield at least as good as you were receiving from the bonds.
If no opportunities present themselves, you get what you had before, which was your basic bond fund and yield.
If opportunities present themselves, then you end up with either 1) a higher return than you would have had of approximately 4% on the capital allocated, or 2) if the trade goes against us, then you end up owning the stock at a discount from today’s price of approximately 15% and with a yield at least as good as you were receiving from the bonds.
See This Article We Published on Seeking Alpha Explaining How it Works
How Your Money Is Invested - Managed Account
Step 1: In low volatility environments, your portfolio is allocated to government bonds as usual.
Step 2: We qualify and pre-screen a basket of up to 20 – 30 different companies that meet our value investment criteria and which we are willing to own for the long term.
Step 3: We track the prices, dividend yields and implied volatility of these stocks on a daily basis to determine if any of them meet our hurdle rate of return criteria. Our return criteria are as follows: 1) the annualized yield, if the option is not exercised, should be at least 5% higher than current corporate AAA bond yields; 2) the price we will have to purchase the stock at, if the put option is exercised, should be at least 15% lower than the current price, and 3) the dividend yield that we will receive if we end up owning the stock should at least equal the yield we would receive on corporate AAA bonds at the time of entering the trade.
Step 4: Implement the trades for those stocks that meet our hurdle rates. This is implemented by selling part of your government bonds and re-allocating that capital to the put-write strategy. Allocate a maximum of 15% of the portfolio to any individual stock. Post the full margin less the premium, so there is no margin risk.
Step 5: At the completion of the insured term, and depending on the outcome, you 1) either own the stock or 2) receive the option premium and capital back which is then re-allocated to either bonds or new insurance opportunities. Stocks that you end up owning can be sold at an appropriate time to recover our capital - this is evaluated on a case-by-case basis.
Our fee for managing this solution is 1% per year and the minimum account size is $25,000. Given the opportunistic nature of this solution, there will be times when there are no opportunities and your capital will simply be invested in a government bond ETF yielding 2%-2.5%. In these situations it does not make sense for you to pay a 1% fee for a product that only yields at best 2.5%. For this reason we also offer the product as a subscription solution, where you receive and pay for the newsletter only when there are actionable ideas that meet our criteria.
Step 1: In low volatility environments, your portfolio is allocated to government bonds as usual.
Step 2: We qualify and pre-screen a basket of up to 20 – 30 different companies that meet our value investment criteria and which we are willing to own for the long term.
Step 3: We track the prices, dividend yields and implied volatility of these stocks on a daily basis to determine if any of them meet our hurdle rate of return criteria. Our return criteria are as follows: 1) the annualized yield, if the option is not exercised, should be at least 5% higher than current corporate AAA bond yields; 2) the price we will have to purchase the stock at, if the put option is exercised, should be at least 15% lower than the current price, and 3) the dividend yield that we will receive if we end up owning the stock should at least equal the yield we would receive on corporate AAA bonds at the time of entering the trade.
Step 4: Implement the trades for those stocks that meet our hurdle rates. This is implemented by selling part of your government bonds and re-allocating that capital to the put-write strategy. Allocate a maximum of 15% of the portfolio to any individual stock. Post the full margin less the premium, so there is no margin risk.
Step 5: At the completion of the insured term, and depending on the outcome, you 1) either own the stock or 2) receive the option premium and capital back which is then re-allocated to either bonds or new insurance opportunities. Stocks that you end up owning can be sold at an appropriate time to recover our capital - this is evaluated on a case-by-case basis.
Our fee for managing this solution is 1% per year and the minimum account size is $25,000. Given the opportunistic nature of this solution, there will be times when there are no opportunities and your capital will simply be invested in a government bond ETF yielding 2%-2.5%. In these situations it does not make sense for you to pay a 1% fee for a product that only yields at best 2.5%. For this reason we also offer the product as a subscription solution, where you receive and pay for the newsletter only when there are actionable ideas that meet our criteria.
Subscription Newsletter Solution for Self-Directed Investors
For this option you will receive a weekly newsletter, assuming there are actionable opportunities to write-put option premium. The cost for the newsletter will be $12 per newsletter. If there are no opportunities that meet our criteria, we will not send out a newsletter and you will not be charged. Given the opportunistic nature of the strategy, we feel this is the most equitable way to deliver our research. The report will contain a list of all the stocks that meet our criteria for the managed account solution, together with expected yields under the two possible binary outcomes.
For this option you will receive a weekly newsletter, assuming there are actionable opportunities to write-put option premium. The cost for the newsletter will be $12 per newsletter. If there are no opportunities that meet our criteria, we will not send out a newsletter and you will not be charged. Given the opportunistic nature of the strategy, we feel this is the most equitable way to deliver our research. The report will contain a list of all the stocks that meet our criteria for the managed account solution, together with expected yields under the two possible binary outcomes.