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Paul Baiocchi, Moderator
ETF Analyst, IndexUniverse
Chintan Kotecha, Panelist
Equity-Linked Analyst, US Equity Derivatives Bank of America Merrill Lynch
Michael Lally, Panelist
Regional Sales Director Capital Wealth Planning LLC
Jeffrey D. Wycoff, Panelist
Managing Partner Fort Point Capital
ETF Options Strategies:
Keeping Your Options Open
Paul Baiocchi Moderator ETF Analyst IndexUniverse
ETF Options Strategies:
Keeping Your Options Open
Chintan Kotecha Panelist Equity-Linked Analyst, US Equity Derivatives Bank of America Merrill Lynch
Jeffrey Wycoff Panelist Managing Partner Fort Point Capital
Michael Lally Panelist Regional Sales Director Capital Wealth Planning LLC
The Current State of the ETF Options Market
ETF option market size & breadth:
Over the last year, the total notional traded on ETF options has ranged approximately $40-50bn per day. For perspective, listed S&P 500 index notional option volume ranged about $80-95bn
Roughly 85% of the total ETF option volume is traded among only four ETFs (SPY, IWM, QQQ, and GLD)
Despite this concentration, there is nearly $6bn notional traded per day in the remainder of liquid ETF options
0
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Q1-
99
Q4-
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Q3-
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Q2-
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Q1-
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Q2-
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Q2-
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Q2-
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Q1-
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Q4-
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Q3-
12
Med
ian
no
tio
nal
vo
lum
e ($
bn
)
SPY IWM QQQ GLD Other
75%
11%
10%4%
Equity $4,416mn
Debt $671mn
Commodity $620mn
Currency $208mn
Excluded:
SPY $26,296mn
IWM $3,392mn
GLD $2,433mn
QQQ $2,235mn
Median daily ETF option notional volume per quarter
Source: BofA Merrill Lynch Global Research. Data through 7 Sep 2012
Q3-12 ETF option notional volume by asset class
Applications and trades with ETF options:
80
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100
110
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150
Dec-1
0
Feb-1
1
Apr-1
1
Jun-1
1
Aug-1
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Oct-1
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Dec-1
1
Feb-1
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Apr-1
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Jun-1
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Aug-1
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Underlying of GLD
TRADE 1: A put spread hedge on GLD to reduce risk in being long gold
Gold prices whipsawed in 2011
Source: BofA Merrill Lynch Global Research. Data through 7 Sep 2012
Applications and trades with ETF options:
0
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Tota
l ret
urn
Trea
sury
inve
stm
ent
0%
2%
4%
6%
8%
10%
12%
14%
16%
30-year Treasury Yield
30-year Treasury futures TR 30-year Treasury yield
TRADE 2: Put options on TLT to hedge a rise in US Treasury yields
US TSY yields near multi-decade lows
Source: BofA Merrill Lynch Global Research. Data through 7 Sep 2012
Applications and trades with ETF options:
1.15
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1.25
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1.35
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1.45
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1.55
1.60
Dec-
10
Feb-
11
Apr-1
1
Jun-
11
Aug-
11
Oct-1
1
Dec-
11
Feb-
12
Apr-1
2
Jun-
12
Aug-
12
Euro/USD spot rate
TRADE 3: Long FXE call options
EUR/USD spot rate declining
Source: BofA Merrill Lynch Global Research. Data through 7 Sep 2012
Iron condors on GLD for alpha:
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GLD Iron Condor HFRI Fund Weighted Composite
Options generally trade rich due to a risk premium that accounts for unexpected increases in volatility
A less risky way to sell options is a short iron condor strategy (short call and put spread)
Short iron condor strategies on equity indices globally have performed well over the long term. With ETF options, this strategy can be applied across other asset classes (Gold in this case)
Hypothetical P&L of a GLD short iron condor A 1M 88/96 106/114 short iron condor strategy on GLD
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
-20% -15% -10% -5% 0% 5% 10% 15% 20%
%-age change in GLD
%-a
ge
P&
L S
ho
rt Ir
on
Co
nd
or
Source: BofA Merrill Lynch Global Research. Data through 7 Sep 2012
Other ETF Options Strategies
Capital Wealth Planning, LLC :
• Building and managing private portfolios since 2005
• Exists at the forefront of implementing covered call strategies on Exchange Traded Funds (ETFs).
• Over $320 million in our ETF Covered Call Equity Income Portfolio
• 20+ years trained and experienced option professionals
• Technology driven platform
• $250,000 minimum investment
Selling Stock Options
Options are Cash Flow Generators Others “rent” from you with an option to buy – for a higher price You receive the cash (“rent-dividend”) – immediately
Current Breakdown:
Simple Covered Call Income Analysis: Purchase Strike Option
Symbol Shares Price Value Price Price Cash Flow
20-Jun 07/21/12
SPY (40%) 1180 $135.50 $159,890.00 141 $0.38 $418.00
SH (15%) 1635 $36.70 $60,004.50 39 $0.20 $320.00
LQD (10%) 340 $116.90 $39,746.00 0 $0.00 $0.00
MDY (10%) 235 $170.70 $40,114.50 182 $0.30 $60.00
IWM (10%) 505 $78.75 $39,768.75 82 $0.40 $200.00
IYR (5%) 320 $62.65 $20,048.00 65 $0.22 $66.00
XLU (5%) 545 $36.75 $20,028.75 38 $0.04 $20.00
Cash (5%) 0 0 $20,400
Optionable Est. Monthly
Portfolio
Value $400,000.00 Cash Flow$
$1,064.00
Est. Annual $
$13,832.00
Est Annual % 3.46%
This illustration of potential portfolio cash flow from a covered call option writing program is not based on an actual portfolio. Covered call option cash flow for any portfolio will vary depending on actual portfolio positions, option premiums received, individual stock price volatility, and general stock market volatility. Positions covered by call options may be called away, creating possibly unwanted capital gains or losses. Cash flow is not guaranteed over any period. More information may be found in CWP’s Form ADV.
Solutions That Work
Practice vs Theory:
Investor Failure:
The Investment Experience
Why Volatility Selling Works
Volatility Strategies Compared
Case Study: DFA Portfolio
Case Study: Blue Chip Portfolio
Thank You.
Questions?
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