Answer your clients call for income
With interest rates at historical lows and dividend growth starting to stall, many investors are seeking ways to generate greater income.
One way of generating greater income via the share market is through a strategy known as a “buy/write” strategy, which uses “call options”.
However when investors think of “options trading” the first word that comes to mind is risky. However options trading covers a lot of different strategies with varying degrees of risk. All investing carries risk, without it there is no reward. Options are no different. Options are not commonly understood however they can add value to a portfolio, in particular portfolios seeking greater income with no more risk than traditional share ownership.
A call options gives the buyer the right to purchase, but not the obligation, to buy those shares at a pre-agreed price. Investors also have the ability to sell call options. By selling call options over shares the investor effectively sells some of the upside capital growth potential of their share portfolio in return for an upfront cash payment. In addition to the share dividends and any franking credits, option premiums earned in this way enhance the income flows available from that share portfolio.
Actual trade completed in HarbourSide Capital IA Strategy 22.4.2016;
- Buy 1000 LLC @ $12.55*($12,550)/ Sell 10 LLC 26th May $12.75 call options @ 32 cents*
- Income return = 32 cents x 1,000 = $320 or 2.55% ($320 / $12,550*100)
- Exercised return = 32 cents + ($12.75 - $12.55) x 1,000 shares = $519.57 or 4.14%
Note: At the close of trade on the 26th May LLC shares closed above $12.75 the exercised return of 4.14% was achieved.
* Interactive Brokers 22.4.2016 all figures are before costs.
The problem for even sophisticated investors looking to implement a buy/write strategy themselves is that it can be time consuming, costly and difficult to implement. The HarbourSide Capital Income Accelerator strategy overcomes these problems through the use of a Managed Discretionary Structure or MDA. MDA’s are like managed funds but provide investors with the transparency of direct share ownership.
So why not use an ETF that utilises this strategy?
In my opinion the ETF structure reduces the effectiveness of the buy write strategy where by investors should be seeking an exercised return on a monthly basis, not just the income return generated from the call premium received.
The exercised return not only provides a larger return on a monthly basis for investors but allows the portfolio to move to cash more regularly, therefore reducing market risk. Additionally the movement to cash gives the portfolio manager the ability to adjust the portfolio depending on favourable market thematics or simply hold up to 100% cash if market conditions are unfavourable, something an ETF cannot do.
For further information on MDA’s or the Income Accelerator strategy or contact HarbourSide Capital + 61 2 9432 7850 or email firstname.lastname@example.org or visit www.harboursidecapital.com.au
Harbourside Capital Pty Ltd (ACN: 166 765 537) an Authorised Representative (AR No. 448907) of HLK Group Pty Ltd (ACN: 161 284 500) which holds an Australian Financial Services Licence (AFSL no. 435746). Any information or advice contained on this marketing material is general in nature only and does not constitute personal or investment advice. All securities and financial products or instruments transactions involve risks.