Sheaff Brock Sells Puts on the SPY

Selling puts on the SPY to help offset market volatility | Sheaff Brock Investment Advisors

Sheaff Brock Sells Puts on the SPY

It has a long name, but the Sheaff Brock Investment Advisors Index Income Overlay portfolio strategy has one simple goal: seeking additional income that is incremental to (meaning on top of) a high-net-worth investor’s existing portfolio.

For those investors comfortable with taking additional stock market risk for the opportunity to generate added (net of fees) cash flow, the Income Overlay portfolio is a long-term, bullish play on stock investing using a the SPDR S&P 500 ETF (symbol SPY). This strategy makes use of put selling, with the options trading serving as an “overlay” on an existing portfolio which serves as collateral for the options account.

How does the strategy work?

Sheaff Brock “writes” (sells) out-of-the-money put options on the SPY, targeting 30-day, 60-day, and 90-day expirations, usually at 3% out-of-the-money, for each of the three months. At the same time, put options are purchased with the same expiration dates, with a targeted strike price 15% below the strike price of the short option. The concept: the risk of the put selling is offset by buying put options to protect the investor from severe market pullbacks.

The SPDR S&P 500 trust is an exchange-traded fund, trading on the New York Stock Exchange under the symbol SPY. Like all ETFs, the SPY trades like a stock, fluctuating in market value, and trading at prices both above and below its net asset value.

The SPDR S&P 500 trust, the first, and now the world’s largest exchange-traded fund, has been around since January 1993. The SPY seeks to provide before-expenses investment results corresponding to those of the S&P 500 index.

The idea underlying the entire Sheaff Brock Index Income Overlay portfolio strategy is using options to take advantage of the difference that typically exists between the implied volatility and the actual volatility in the marketplace.

In the end, it all comes back to this one concept: Instead of feeling at the mercy of market volatility, by selling puts on the SPY, Sheaff Brock clients may have opportunity to harness its power.

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