Greg
Flower
Wealth
Management
Discretionary Wealth Management
Put Call Options Strategy
Presented to the 5th Annual – 2016: A Tax Year in Review: Canada, US & Cross Border
Tips, Tricks and Traps for Professional Practitioners
Kelowna BC
Wednesday , September 28, 2016
Disclaimer
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The information included in this document, including any opinion, is based on various sources believed to be reliable, but its accuracy and completeness is not guaranteed and
Leede Jones Gable Inc.. does not assume any liability in providing it. The information provided is current as of the date appearing on the document and Leede Jones Gable Inc...
does not assume any obligation to update the information or give a description of further developments relating to the securities or material discussed. It is for information only,
is subject to change at any time, and does not constitute an offer or solicitation to buy or sell any securities referred to. The information presented here and any financial service
being offered is directed only at persons who are residents of a Canadian province or territory where Leede Jones Gable Inc.. is licensed. Leede Jones Gable Inc.. is not permitted
to recommend buying, selling or holding securities of any issuer to which it is related, and in the course of a distribution, to which it is connected, unless it makes a complete
statement of its relationship, if any. Leede Jones Gable Inc.. is not permitted to recommend buying of any secondary market securities of an issuer for whom it is actively engaged
as an underwriter of a new issue. Leede Financial Markets Inc., their affiliates, directors, officers, and employees may buy, sell, or hold a position in securities of a company
mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit
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Leede Jones Gable Inc.. 2016. Member CIPF and IIROC.
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Transactions in options carry a high degree of risk. Purchasers and sellers of options should familiarize themselves with the type of option (i.e. put or call) which they contemplate
trading and the associated risks. You should calculate the extent to which the value of the options must increase for your position to become profitable, taking into account the
premium and all transaction costs. The purchaser of options may offset or exercise the options or allow the options to expire. The exercise of an option results either in a cash
settlement or in the purchaser acquiring or delivering the underlying interest. If the option is on a future, the purchaser will acquire a futures position with associated liabilities for
margin (see the section on Futures above). If the purchased options expire worthless, you will suffer a total loss of your investment which will consist of the option premium plus
transaction costs. If you are contemplating purchasing deep-out-of-the-money options, you should be aware that the chance of such options becoming profitable ordinarily is
remote. Selling ("writing" or "granting") an option generally entails considerably greater risk than purchasing options. Although the premium received by the seller is fixed, the
seller may sustain a loss well in excess of that amount. The seller will be liable for additional margin to maintain the position if the market moves unfavorably. The seller will also
be exposed to the risk of the purchaser exercising the option and the seller will be obligated to either settle the option in cash or to acquire or deliver the underlying interest. If
the option is on a future, the seller will acquire a position in a future with associated liabilities for margin (see the section on Futures above). If the option is "covered" by the
seller holding a corresponding position in the underlying interest or a future or another option, the risk may be reduced. If the option is not covered, the risk of loss can be
unlimited. Certain exchanges in some jurisdictions permit deferred payment of the option premium, exposing the purchaser to liability for margin payments not exceeding the
amount of the premium. The purchaser is still subject to the risk of losing the premium and transaction costs. When the option is exercised or expires, the purchaser is responsible
for any unpaid premium outstanding at that time.
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Not all securities are suitable for every investor. If any of the securities interests you, please feel free to contact Greg Flower at 403-531-6831. The comments and opinions
expressed herein reflect the personal views of Greg Flower. They may differ from the opinions of Leede Jones Gable Inc.. and should not be considered representative of the
research beliefs, opinions or recommendations of Leede Jones Gable Inc..
Leede Jones Gable Inc.
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National Firm
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Over 150 Advisors
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Rated #1 firm to do business by advisors (Investment
Executive – 2016 Brokerage Report Card)
Independent
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No bank affiliation
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No internal product
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No cross selling
Owned by Advisors
Retail Focused
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No pressure to sell Corporate Finance product
Secure
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CIPF Insured
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2.5 Billion in Assets
Full Service
The Current Investment Dilemma
• Traditionally, retirement portfolios would hold a large portion of Bonds
• Unfortunately, in the current environment their yield would not
finance many retirements
• A portfolio of large cap dividend paying stocks can be built to pay out a
yield higher than that paid by a portfolio of investment grade bonds.
• Current equity environment does not forecast the type of growth seen
over the past few decades
• Equities are more volatile
How does an retiree create a portfolio that would finance a retirement in this
environment without taking undue risk?
Generating Capital Gains
• That’s easy…… just buy stocks low and sell them high…………not!!!
• The sale of puts and covered calls generates a guaranteed capital gain
via the put/call premium
• Still need to pick good equity investments that are option eligible.
• The following strategy starts with 50% exposure to equities and 50%
cash. This significantly reduces the volatility.
Strategy reduces risk of investing in equities and produces tax efficient
enhanced yield via capital gains
Generating Capital Gains - Tax Aspects
• General
• The sale of premiums on Options creates a tax efficient income stream whereby
they attract half the amount of tax as a similar amount of income.
• The Capital Gain generated on the option premium can be used and carried back
against current and three previous years of Capital Losses and can be used against
future capital losses(no time limit).
• Corporate
• Using the capital dividend account (CDA) ensures this tax efficiency is maintained
in the event such gains are ultimately distributed out to the shareholders.
Strategy reduces risk of investing in equities and produces tax efficient
enhanced yield via capital gains
The PUT/Call Option Strategy
• Investor has a need to invest in equities as this asset class can generate a
higher more tax effective yield than bonds.
• Investor would like to enhance yield to be greater than the dividend alone.
• Investor would like this enhanced yield to be treated as capital gains which are
more tax effective.
• Investor may have capital losses in current or previous years that could be
used to further mitigate tax. (Losses can be carried forward indefinitely)
Strategy reduces risk of investing in equities and produces tax efficient
enhanced yield.
The PUT/Call Option Strategy Matrix
We sell Calls and Puts to generate premiums which add to the yield of
the portfolio and reduce risk.
Strategy reduces but does not eliminate the risk of investing in equities and
produces tax efficient enhanced yield.
The PUT/Call Option Strategy
By selling a put or a call we are selling the chance that the future price of the stock achieves the highlighted level.
The buyers pays a premium which would be less than the price paid for the actual security. This leverages the
investment for high reward but also with the possibility of losing his investment if the option expires “out of the
money.
Far “ Out of the Money” Option
Less “ Out of the Money” Option
Or
More Time
Or
More Volatility
The Covered Call Strategy
Enhancing Portfolio Returns and Mitigating the Risk of Equity Exposure
• First, we build a diversified portfolio of large capitalization stocks most of which will pay a
dividend. Although not exciting returns, these will yield around 3%. This is currently preferable to
bond returns.
• Second, we utilize a strategy of selling covered call options against the existing equity positions.
This will generate and additional 2-3% per quarter of income, plus bonus gains if the target call
price is achieved. What is selling a covered call? By selling a call against an existing position our
strategy gives another investor the right to buy the position from us at a set price any time within
a specified time frame at a price higher than the current market.
The Covered Call Strategy
Enhancing Portfolio Returns and Mitigating the Risk of Equity Exposure
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Buy 100 Shares of Lowes in Nov. 2015- 100 shares @ $70 =
Sell the right to buy from us @ $77.50 until January – 2 month premium
Option expires in January as Stock price is below $77.70
Sell right to buy from us @ $75 until April – 3 month premium
Stock is trading above $75 in April, we think there is more upside
We buy back the April $75 call and sell a July $77.50 call
In July if stock above$77.50 and we can let it be assigned
Gain on transaction - 14%
In July if stock is below $77.50 the option will expire
We would then sell another 3 month call option
$7000
90
150
0
7750
990
The Put Strategy
Enhancing Portfolio Returns and Mitigating the Risk of Equity Exposure
• Investor is bullish on the company but does not see the stock
rising over the short term
• Investor is comfortable buying the stock at a price lower than
the current market price and will buy at the strike price even
if market is below strike
• If stock is bought we would then aggressively sell a call
option with the intent of getting back to the 50/50 split
between Equity and Cash
The Put Strategy
Enhancing Portfolio Returns and Mitigating the Risk of Equity Exposure
• We like Canadian National Railway but think that it is trading too high and would prefer to buy it at a
lower price
• In early January with the stock trading @ $75 we sell a March put which gives someone the right to sell
us the stock @ $72
160
• We commit $7200 and put it into a money market fund
• In March the stock is trading above $72 so it is not bought
• We sell a June put which would obligate us to buy @ $74
100
• we add $200 to the money market fund
• In June, if the stock is below $74, we buy the shares
7400
• We sell Sept 74 calls
• In Sept the stock is above $74 and the shares are sold
• 9 month return on $7400 = 5.5%
150
7400
410
The Covered Put Strategy a Diversified Approach
Enhancing Portfolio Returns and Mitigating the Risk of Equity Exposure
Note: This is an example of premiums at a certain point in time. Premiums generated will change based on market conditions.
The Covered Put Strategy a Diversified Approach
Enhancing Portfolio Returns and Mitigating the Risk of Equity Exposure
Note: This is an example of premiums at a certain point in time. Premiums generated will change based on market conditions.
Greg Flower Wealth Management
Discretionary Wealth Management