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Allocating Clients’ Assets with Confidence - Continued

As an alternative to covered calls, you may wish to explore cash-secured put sales. Many advisors refrain from collateralized put sales deeming the transactions as “too risky.” In reality, the profit and loss characteristics of a cash-secured put sale and a covered call are nearly identical. Last year the CBOE issued a white paper on the CBOE® S&P 500® PutWrite Index (PUT). As you can see from the table on page five, the index was able to generate a higher rate of return than the S&P 500 portfolio while assuming significantly less risk.

An individual can replicate the strategy using options on the S&P 500 ETF (SPY). However, the non-equity index options on the S&P 500 (SPXSM and Mini-SPX) generate notably higher after-tax returns thanks to their 1256 status that treats 60% of any gain as a long-term capital gain and 40% of any gain as a short-term capital gain.

The principal objective of these strategies is to reduce the amount of portfolio volatility. As the first wave of baby boomers starts to retire, they are seeking out advisors that can reduce the amount of volatility within their investment portfolios so that they may maintain their standard of living well into retirement. Accordingly, advisors who shift their focus from managing returns to managing risk will differentiate themselves from their competitors and garner a larger share of boomer assets.

As advisors and investors, we all fear Murphy’s Law. The anxiety of committing capital in a volatile market is enough to keep anyone up at night. If used prudently, options can allow you to replicate the returns of your corresponding index with significantly less risk. By utilizing risk-management tools to manage risk, you can allocate client accounts with confidence.

Rudy Aguilera is a founding principal with Helios, an independent fee-only Registered Investment Advisor that offers objective investment counsel free from industry and product affiliations. Helios works closely with advisory firms so that they may expand their suite of services to include low-cost, diversified, tax-efficient portfolios that exhibit less volatility than traditional equity investments. You can reach Mr. Aguilera at


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CBOE Volatility Index (VIX)