Peter Montgomery, Partner at Carrick Lane, joined Keith Black, Managing Director of RIA Channel, to discuss the risk and return potential of monetizing equity market volatility.
Carrick Lane is an equity derivatives manager focused on options overlay strategies, making existing assets work harder for investors. Montgomery works to educate advisors on ways to maximize returns and reduce risks.
Carrick Lane implements option overlay strategies on equity, fixed income, or diversified portfolios. Because the trades are placed in an SMA, Carrick Lane can use existing positions as collateral, so there is no need to allocate additional capital and change the asset allocation to fund the options overlay strategy.
Selling put options on the S&P 500 Index can earn mid-to-low single-digit annual returns. The strategy sells out-of-the-money put options and is likely to earn flat to positive returns in up, flat, or slightly down markets. The strategy lost money during the sharp market selloff in the first quarter of 2020 but ended the year with a gain. This return is in addition to the return on the investor’s portfolio, as no assets need to be sold to fund the strategy.
While the strategy can be benchmarked to the Cboe PutWrite Index, Carrick Lane actively manages its options overlay strategies. The strategy likely underperforms the index in a strong up market and outperforms in a strong down market.
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