MerQube’s Angelos On Using Options In Portfolio Construction

John Angelos, Senior Director of Business Development for MerQube joined Keith Black, Managing Director of RIA Channel, to discuss how advisors and asset managers can use options to mitigate risk and generate income. 

Options allow investors to define their risk and reward parameters and can be used to mitigate risk or seek to enhance overall return.  Asset managers deploy three main options-based strategies.  First is the hedged equity or risk mitigation strategy, which seeks to prevent significant drawdowns by buying puts or put spreads, as put options increase in value when the underlying market declines beyond the strike price before expiration.  Second, similar to selling insurance, are income generation strategies, which sell put options or call options to generate income.  The third strategy combines both income generation and risk mitigation, typically selling call options to reduce upside potential while using the call premium to purchase put options for risk mitigation. 

Exchange-traded options are transparent, regulated, and centrally cleared.  MerQube works with managers of active funds and ETFs to create and calculate rules-based strategies and indices.  MerQube can provide historical returns for rules-based investment strategies, such as single stock or stock index exposures with options overlays.  These historical returns can be used to evaluate the risk-return tradeoffs of various strategies as well as to benchmark returns and calculate net asset values.  Historical returns can also be useful in the portfolio construction process, as investors can determine how an allocation to an options-based strategy may be able to improve their expected risk-return tradeoff. 

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