Envestnet, a leading provider of integrated technology, data intelligence and wealth solutions and also one of the largest direct index separately managed account providers, has officially announced the launch of an Options Strategy Quantitative Portfolio (QP).
According to certain reports, the stated portfolio is designed to address the market volatility, tax risk, and liquidity risk associated with concentrated stock positions, doing so by helping advisors and their clients unwind these positions.
To understand the significance of such a development, we must acknowledge the problem of those investors who may find themselves with concentrated stock positions for a number of reasons, such as an inheritance, a large stock position granted by a company, shares from a business sale, or simply loyalty to a long-term holding. These concentrated stock positions, like you can guess, make them vulnerable to loss if the company underperforms and its stock drops.
Furthermore, for investors holding a concentrated position in less liquid or closely held stocks, sometimes selling the position without moving the market or finding buyers can be difficult when trying to exit the position.
Hold on, there is more, as even selling a concentrated position in a stock, which has seen strong appreciation, causes problems by triggering significant taxes. All these challenges make investors delay selling, leading to a prolonged concentrated position,
In response to that, Envestnet’s offers investors three options-based hedging solutions that can help generate income from and/or mitigate the risk of a concentrated position, while simultaneously boasting an ability to spread out taxable gains over a multi-year time span.
“In keeping with Envestnet’s ongoing commitment to innovation and addressing investor needs, we have created a broad, scalable solution which can be customized to help individual investors optimize the income from concentrated stock positions,” said Brandon Thomas, Co-Founder and Co-Chief Investment Officer of Envestnet. “The Options Strategy QP is underpinned by the robust, quantitative methodology and dedicated support the industry has come to expect from us—and is designed to help advisors and their clients take advantage of options-based strategies on their terms, in ways that they are most comfortable pursuing.”
Talk about these solutions on a slightly deeper level, we begin from Covered Calls. In essence, call options enable the buyer to buy an underlying asset at the strike price of the option by its expiration date, and n the other hand, they require the seller of to sell that underlying asset. This is because covered calls get selling call options to cover an investor’s shares of the existing stock position to generate more income and mitigate downside risk.
Next up, we have Protective Puts that make it possible for the option buyer to sell the underlying asset at the option’s strike price by its expiration date, and require the option seller to buy the underlying asset. Markedly enough, a protective put strategy involves two positions i.e. the long-put option and shares of the underlying stock. Hence, profit from the put option can directly offset the decline of stock price below the strike price when the option expires.
Another detail worth a mention here is rooted in how Options Strategy QP’s protective put approach can also be customized by investors and their advisors using desired downside protection, number of shares to hedge, and the projection’s time horizon.
The third and final solution of Envestnet’s QP is its Collar Strategies. The stated strategies, which involve buying a put and selling a call on the shares of the underlying stock, can deliver downside protection at a lower cost by financing the purchase of put options with income generated from call options.
These strategies also adhere to a given client’s desired risk tolerance, and at the same time, generate income in a case-specific manner.
“Our rules-based process is key to helping high-net-worth investors potentially increase returns from concentrated stock holdings through strategic liquidation, while reducing risk and offsetting taxable gains,” said Hunter Willis, CFA, Portfolio Manager for Envestnet’s Quantitative Research Group. “We don’t just accept the outcome of a position—we look to optimize returns by utilizing stock-specific inputs designed to capture the volatility risk premium in each stock option.”
