Funds Use Options To Enhance Income Essay

Funds use option to generate more income and to cushion against losses that may arise from the recent stock-market run-up, gains consideration. A popular strategy is the use of "covered calls" where the investor (or the fund) generates additional income by selling the rights to buy some of its stock holdings to another investor at a set price.
According to Tyler Vernon of Biltmore Capital Advisors, the strategy makes much more sense especially when the stock market is faced with volatility. Various investors have realized the same. Dick Cancelmo of Bridgeway Managed Volatility confirms that Covered-call writing is always less risky than the outright stock ownership.This strategy is most effective when the market is experiencing gradual increase, or is relatively flat so that the income collected from the option sale exceeds the potential gains that may be forfeited.
If the agreed-upon date is reached and the stock gains fail to rise above the strike price, the extra income from the option sale is directed to the fund. However, if the stock gains are above the price within the agreed time, the fund hands over the stock to the option buyer, keeping the income from the option sale and forfeiting any future gains. The highest premiums are obtained if the stock is most volatile.
Just as any other investment, there are associated risks. However, investors are urged to stick with the fund managers who have experience and good track record in using the fund. The option strategies vary depending on the manager’s choice. They include: selling covered calls on a broad index; writing on individual stocks; or buy put options. This strategy has been effectively employed by the Gateway, Bridgeway Managed Volatility, Neiman Large Cap Value, Aston/M.D. Sass Enhanced Equity, and the Schooner Fund, among others.