Aptus Capital Advisors offers a range of custom Option Overlay strategies that aim to a) generate income, b) facilitate tax-efficient transitions, and/or c) provide downside hedging for clients with concentrated stock positions.
Watch as John Luke, CFA, and Jake Marriott discuss:
- The strategies are actively-managed to take advantage of market movements, rather than a “set and forget” approach.
- Active management involves monetizing put options when they go in the money, and dynamically adjusting covered call positions to capture more upside in rising markets.
- Case studies on Nvidia demonstrate the benefits of shorter-duration options and active management, showing higher income generation and better participation in both up and down markets compared to longer-dated, passive strategies.
- Aptus emphasizes the importance of these strategies in protecting clients’ wealth and lifestyle when they have significant exposure to a single stock.
Hope you enjoy, and please send a note to [email protected] if there’s a particular topic you’d like to discuss further.
3 Minute Read: Executive Summary
Full Transcript
John Luke
Well, hello everyone. Thank you for tuning in. This is our first sort of impromptu meeting to discuss our overlay offering at Aptus and some of the unique things that we have going on underneath the hood. So, I’m here today with Jake. Before we get started, let me take care of the disclosure so I don’t get yelled at.
“The opinions expressed during this call are those of the Aptus Capital Advisors Investment Committee and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. More information about Aptus investment advisory services can be found in its form ADV part two, which is available upon request.” So now we got those out of the way.
Jake
Good work, JL.
John Luke
But really, some of those disclosures really define a lot of what’s going on with these overlays, where it’s constantly changing and being modified with market backdrop. So, I was thinking we start this off with just talking through some of our offerings. So Jake, do you want to kind of lead the front on that side?
Jake
Yeah. So, the option overlay really can go into three different buckets, three goals for clients, and the first one is just generating income. And this is income with the intent to retain all of your shares. So these are going to be conservative cover calls, pretty far out of the money, normally looking 7 to 15 Delta, so low likelihood of finishing in the money.
And the goal here is if your client has an income need and they have a concentrated stock position with low basis, they don’t want to sell shares and pay those taxes, then we can make something meaningful of that position by generating some income using conservative cover calls.
The second bucket is a transition bucket. So this is a concentrated position, but the client is open to exiting out of this position tax neutrally or tax efficiently over time. And the way we do that is selling more aggressive cover calls, so closer to the money.
And as the stock price goes above the call strike, what we’re going to do is we’re going to have a loss in that option and we’re going to use that loss to offset the gains from the sale of the concentrated position, and then use the proceeds to diversify into their desired allocation. So more diversified basket over time.
And you can also use the premium generated to pay for your tax bill as well to help accelerate that process, as well as giving us an annual tax budget that we can sell more than what the loss is generated in the options to expedite that transition process.
And then finally, you have the hedging piece. So, we have a bunch of different flavors of hedging just based on the client’s bullishness on the sock, willingness to sell shares and so on. But essentially, what we’re doing is we’re buying insurance for the client. And in the case that underlying that concentrated position goes down significantly, we would get paid in cash by selling that option, and then that can be used to allocate to diversify portfolio.
And so yeah, those are the three buckets. But as JL was alluding to in the intro, we’re doing these a little bit differently than other overlay managers in the space. We’re really taking an active approach to the management of these strategies, and that’s our differentiator and what we’re really excited about providing a little bit different, and what we think results in better outcomes for clients.
John Luke
Yeah. No, I think that custom piece is really key to delivering on the options management. And that’s a big piece of what we’re doing in the bulk of our ETF strategies, is the options mandates are very active, and that Aptus piece really gives you a big advantage to take advantage of markets and market movements.
And so, when you’re designing these custom option overlays for single accounts, you can take that same process, institutional process, not set it and forget it, and implement it for clients. And I think we’ve done some case studies which we can talk about, but maybe the real-world example that you dig in on is back in April there was a lot of noise in markets. As we all know, we saw a little over a 20% decline.
And fortunately, we had already implemented a number of custom overlay positions for clients at that point, and fortunately for them they got to immediately see some of the benefits. So Jake, maybe just kind of chat through what’s the process there as we see these puts going to money and how it can benefit the clients?
Jake
Yeah. So, where active on the put side is really looking to monetize or take some profits out of your put protection or your insurance when the stock is down. Because the worst thing that could happen is you have a six-month put protection, and for the first three months your puts are in the money and you’re thinking, “I’m protected,” and you see a V-shaped recovery similar to what we saw the JL was mentioning, and those puts expire worthless.
So in order to avoid that, what we would do is, and what we did in quite a few client accounts, is as the put went in the money, as the stock price went below our put strike, we would sell the protection that we had and then roll it down to the next strike or maybe two strikes lower. So we still have protection in place, meaningful protection in place on the downside, but we’re taking small profits out.
And in a lot of cases, like Apple’s the one that comes to mind, had we just set it and forgot about it, and waited and hoped that the stock stayed below our put strike, now where the stock is that those puts would’ve expired worthless. But instead, we monetized them and actively manage them, and we were able to put some money in our client’s pockets that they wouldn’t have otherwise had.
John Luke
Yeah, and I think what’s important there that you hit on a few times is it’s not like we’re making a market call and we’re taking off the protection. Now of course, you could do that if the client gave you the mandate, “Below a certain price, we don’t want, well, puts.” But for these illustrations and real-world examples, we were taking profits, monetizing those puts, kind of building up for future hedge budgets or getting the cash from the profits redeployed back into whatever the client wants.
But that piece I think is really big, because as we’ve talked about in a number of our other calls, we think that we’re in maybe the decade of the tails. We’ve already seen three 20% or greater drawdowns in this decade already. And typically, you only see one of those every five, maybe five and a half years or so.
And so, as you see these bigger drawdowns occur in markets, they’ve been followed by monumental rises back above and to all-time highs, as we’ve seen this summer. So, it’s really important that your act is nimble with deploying these strategies. And the other key piece is just being shorter-dated.
And so, one thing we kind of die on the hill of is when you have options deployed, you want to stay in a shorter duration profile, for the most part, so that you can actively manage those positions and get the feel, the Delta feel if the stock moves one way or the other. And so, when you put that together, it just leads to good outcomes.
And I’ll compliment Jake in turn here as well, is whenever that we’re doing these trades in client accounts, we’re putting together some really strong commentary for you as the advisor to go back and really speak to your clients about the Aptus value that we’re bringing to the table with the strategy.
And the other thing that Jake didn’t harp on as much as maybe I would, is if there was no trade that occurred during that period in April, yeah, your put went up in value, but you gave all of that back and more if you didn’t actively adjust the strategy.
And many of the strategies probably would’ve reached their upside cap, where it very easily could have been modified or even taken off, as in the short call of the strategy taken off during that sort of turmoil on markets.
And so really, when you put kind of the expectations and getting that really controlled on the front end of what the client’s looking for, and then you build on top of that, the active management, it really just breeds better opportunities and outcomes for clients.
Jake
Yeah. JL-
John Luke
Jake, you got anything?
Jake
Oh, I was just going to add, we hit on the benefit of active management on the downside, but I think the best example of the active management on the upside on the cover calls would be that the case study in Nvidia. So I was just going to share my screen real quick and we can kind of summarize that.
So essentially, what we’re doing here is we’re comparing cover calls, 10 Delta cover calls, and we’re comparing a sell six month and hold them into expiration, sell three month and hold them to expiration, and then two three month where we’re actively managing them, whether it’s rolling them every time they go in the money or rolling them every time they go in the money, or they’re at a 90% gain.
So, these are kind of hard rules that we’re always monitoring. And so what we did is we back tested this on Nvidia, which is a name that we see a lot, obviously due to the concentration and how much it’s gone up recently. But we did these four strategies in a year where the stock was up significantly as well as a year where it was down significantly, and wanted to just look at what are the outcomes, which one of these works out better?
And as JL alluded to earlier, we’re in the shorter duration of these options, especially for calls specifically, because we’re able to earn that income quicker due to the time value deteriorating faster, closer to expiration.
So essentially, what we have here is that in 2024, the Nvidia was up 189% from January to January, and if you sold calls six months out and held them until expiration, you would’ve participated in 69% of that 189% run. So, we see a lot of advisors who maybe had a set it and forget it option strategy on Nvidia, and obviously we have upset clients and upset advisors, and they also are only generating 3.47% over that time period.
You compare that to approach similar to what we’re doing, which is shorter, really one to three months on the cover calls, and active, you would’ve participated in 152% of that 189% run, and you would’ve also generated 15% in income as opposed to 3.47. So you see that the big thing in an upward trending market is you’re going to get more upside by being shorter and actively managing. Now, what about-
John Luke
And you’re resetting that cap more often.
Jake
More frequently. Exactly.
John Luke
And you’ve got the ability to keep ratcheting up as markets move, versus the longer term, which we’ve seen a lot of, as Jake alluded to, a lot of problems with these longer dated solutions is they sound great on paper on the front end, but the stock realizes a lot of volatility, something like Nvidia or Tesla. And what you end up with is most clients aren’t going to be real satisfied with leaving two thirds of the return in a really big up year to the market maker gods.
Jake
Exactly. So then, we also compared it to in 2022, Nvidia was down 42%. So in a down year, the benefits of shorter and active are that you get to roll more frequently. And so in this case, really the biggest benefit is every time that we sold an option and we were at a 90% gain, then we closed that out and sold a new option.
So, we were able to generate more income in a down market, as you can see here, compared to if we sold that one six month call, it was pretty much the stock goes down significantly and it’s worthless, you could buy it back for next to nothing, but we see quite often that that’s not what other managers are doing. So, the active nature on the downside is you’re going to generate more premium. The active nature on the upside is you’re going to get more of that upside participation.
John Luke
Yeah, I think that this case study just illustrates a lot of what goes on behind the scenes of how we’re managing these positions. And yeah, it’s a case study on Nvidia, but we’ve seen this play out in real terms with a number of clients on not just Nvidia on a number of different positions.
But ultimately, what you continue to see is it’s an easy conversation to go to as the advisor to your end client that’s got this position, which oftentimes makes up a large chunk of their portfolio. It’s kind of their baby in a sense, where you can go and really show the value of whether it’s the protection in down markets or the income and flash up or down markets that you can deliver a unique profile through a variety of different market environments using these strategies.
Well, I told you, Jake, we’d do 20 minutes. We got a couple more, but I think that we’ll try to be short, which is maybe a unique feature of a lot of the video that we do at Aptus. But I think as we look forward, hopefully we’ll do a number more of these and we can get more in the weeds with some other cases, specifically to highlight different trades.
But what I think from my seat, and as we talk with a number of advisors, I think this is just a great opportunity to search inside of your book and look for some of those highly concentrated positions that clients hold. We’ve got the benefit of offering lower minimums than most of the competitors in the space, and a lot of flexibility to make something work. But for those positions that clients have that are concentrated, they can have a big swing on the account value or their networks.
And a lot of times, implementing something like this can be a key differentiator for you to either retain their business or gain more of their business. But what we see a lot is advisors are winning business because they come to the table with these dynamic, actively managed strategies that no one else is doing in our space.
Jake
Yeah. One thing I would just add, that it’s kind of amazing how many of these, when we look through advisors book of business that exists, where people have 50% or more of their net worth in a single stock, whether that be because they picked a winner a few years ago or because they worked for the company and they’re loyal to it and want to hold it.
And the thing that I always think about and bring up on these calls, is we’re protecting you from if this stock gets cut in half, is your lifestyle change? Does your planning situation change? Do you have to work longer? It becomes a source of increasing the likelihood of success for the overall plan. And that’s how I think you can structure these introductions, and it really shows the power of these strategies.
John Luke
Yep, 100%. Well, if we can help with any proposals or any conversations, as you can expect with Aptus, the willingness of the team to roll up its leaves and really help with anything, whether it’s hopping on in clients and explaining the strategy and what we’re going to do.
We’ve seen a lot of success in closing deals because of that willingness to really speak through the strategy, the expectations, and setting it up the right way on the front end. So if we can help, please reach out, we’d love to chat more. And yes, we’ll see you next time.
Jake
Sounds good. See you, JL.
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security.
The opinions expressed are those of the Aptus Capital Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.
Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517-7198. ACA-2508-25.
