One result of the low to no-interest rate environment has been a shift toward options overwrite strategies.
“In a typical portfolio you’ll have a 60-40 split of equities to fixed income. Fixed income essentially returned nothing to your portfolio [in 2013],” said Alan Grigoletto, vice president of education at the Options Industry Council. “I think a lot of people got very antsy about the fact that interest rates were staying low and we had QE Infinity going on. People said, ‘I’m not really making anything on this, I’m not making anything on cash — is there some alternative we can employ to get better than a 2.5% yield?”
Options overwrite strategies became more popular in 2013, he said. An overwrite is a type of covered-call strategy that consists of writing call options on stocks you already own to generate income from the options premiums and dividends. Investment advisors rarely execute overwrite strategies themselves, but if they think a client should be involved in that strategy, they will often choose a sub-advisor or asset manager who employs an overwrite strategy in their portfolio management, he said.
Grigoletto said the growth in that segment is likely to continue in 2014.
“We looked at the low end and high end of returns in the overwrite space, and they turned out to be on average an estimated three times better than Treasury Bills, at the very low end. You’re taking on more risk for sure versus a standard Treasury Bill, but I think [the overwrite strategy was] couched as something that might incur a little more risk but can produce better returns than your cash money market account,” Grigoletto said.
However, if interest rates go up again, that could naturally lead to higher volatility, which might end up shifting volume away from the overwrite strategy to another strategy that also employs puts.