After the scalding they took from the financial crisis, more institutional investors are embracing options strategies both to lock in upside gains and limit downside losses.
“It's been going on for some time, but lately there's a lot more activity because of two things,” said Terrence Ransford, director of trading for Northern Trust Securities, the broker/dealer subsidiary of Northern Trust Corp., Chicago.
“Money managers are extremely anxious to mitigate some of the volatility in their portfolios,” he explained. “And when the VIX (the Chicago Board Options Exchange's gauge of stock market volatility) was hitting new highs, the swings were so dramatic that many end clients — foundations, endowments, corporate pensions — all became interested in ways to manage volatility.”
And these days, because there are “no returns anywhere,” investors are looking to options strategies to scrape any alpha they can out of the stock market, Mr. Ransford added.
“Everybody's looking for some way to enhance returns,” he said. “Now that volatility is back down, covered (call) writing has become a good way to find some alpha, and there's a lot of it going on. Very, very big (pension) plans and very large endowments.”
He declined to identify the funds.
Industry players said that most pension funds, endowments and foundations do not handle options strategies themselves but instead direct their money managers to do so.
But there are some exceptions. According to the minutes of the Indiana Public Employees' Retirement Fund's May board meeting, trustees approved a plan that would allow staff to write up to $500 million in notional value of call options on domestic equity indexes as a way to manage the $12 billion fund's overweight position in domestic equities.
And in December, the board of the $4.6 billion San Bernardino (Calif.) County Employees' Retirement Association approved a covered call strategy for its S&P 500 index mandate, which was valued at $230.3 million at the end of last month. The strategy is managed by State Street Global Advisors, Boston. According to meeting minutes, the reasons for implementing the strategy included: record premium income from selling the options and the association's need for liquidity.
Covered call writing, also known as a buy-write strategy, involves writing, or selling, call options against a long stock position. Calls give holders the option to buy a security at a set price, known as the strike price, for a given period of time. Put options give holders the option to sell a security at a set price.