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Options Are Effective Means to Increase Alpha
Traders Magazine Online News, June 15, 2017
There’s more than one way to grab alpha in today’s equity markets than just buying or selling stocks.
And that’s using options.
According to Grant Johnsey, Head of Institutional Sales at Northern Trust’s Brokerage division, who recently spoke with Traders Magazine, options can be effectively used in a buy-side trader’s portfolio easily and boost his alpha capture. Grant explained that when working with institutional clients, he’d seen a traditional reluctance to incorporate option strategies into their investment strategies, fueled in part by the perceived additional risk they carry. Part of that reticence comes from the traditional divisions of labor inside investment firms – options based strategies do not fall neatly into the traditional buckets of equity, fixed income, or alternatives.
Grant Johnsey
He argued this permits pension funds and other institutional investors to miss out on opportunities that options can be an effective means of enhancing alpha and reducing risk. But now as alpha generation and preservation becomes increasingly incremental and difficult, Grant now is seeing a trend of adding option-based strategies to the investment portfolio of many institutional clients.
“We have seen a marked increase in the number of institutional investors that are utilizing or considering option based strategies,” Grant began. “It’s a shift from what we’ve seen in the past.”
Historically, Grant said that options had been primarily used by either fund managers or hedge funds. These users would typically be using them to either express a view on a particular stock or segment of the market, or perhaps use as a hedging vehicle or enhance a previously established view on the market. Not so anymore.
“What’s different in this shift is that the demand or inquiry into the use of options is coming from the actual institutional asset owners,” Grant explained. “So, it’s coming from the pension fund or the not-for-profit/endowment. And the inquiry is not as much about expressing a view, not even necessarily how to hedge themselves, but more so a trend is on actual income generation.”
So, options are being used – but just what types of strategies? One leg or multi-legged?
As Grant sees it, both strategies are being used by different buy-siders.
“It depends on the fund manager hired,” he explained. “Primarily we are seeing simple strategies, namely covered calls or buy writes. Some managers have slightly different takes on how to implement. We also see growing interest in multi-leg strategies, namely selling volatility as well as tail risk hedging.”
Not all options are created equal though -as some managers have certain investment time horizons while others have different ones. So, what do they prefer – monthlies, weeklies or even dailies?
Grant said institutional users are opting to get their feet wet with the monthly expiration options.
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