Shownotes
From Lake Tahoe, Zephyr market strategist Ryan Nauman hosts Zephyr’s Adjusted for Risk Podcast featuring YieldMax ETFs strategist and CNBC contributor Mike Khouw to discuss the fast-growing trend of using options and other derivatives inside ETFs for drawdown management and enhanced income. Khouw shares his derivatives background, explains YieldMax’s approach to single-stock option income ETFs. They cover the macro backdrop (inflation, labor trends, and a potential new Fed chair), why cash flow matters for many investors, how options overlays tend to perform in different markets, and key advisor considerations and misconceptions around single-stock products, including concentration risk, taxes, and the tradeoff between distributions and price appreciation. Khouw directs listeners to yieldmaxetfs.com for fund details and holdings transparency.
00:00 Welcome and Topic
01:18 Meet Mike Khouw
02:38 YieldMax Strategy Overview
05:26 Cash Flow vs Growth
12:50 Why Options Overlays
16:05 Options ETF Boom Explained
22:42 When Overlays Work Best
30:43 Advisor Due Diligence
33:44 Concentration and Tax Angles
37:19 Portfolio Fit and Examples
43:00 Where to Learn More
43:38 Final Thanks and Subscribe
Transcripts
Let's go.
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Ryan Nauman Market Strategist Zephyr:
Hello everyone and welcome to
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zephyr's adjusted for Risk Podcast
from the shores of Lake Tahoe.
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I am Ryan Nauman, the market
strategist here at Zephyr.
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One of the hottest trends in the ETF
space has been the inclusion of options in
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other derivatives within the ETF wrapper.
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While some.
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strategies focus on protecting
against drawdown risk.
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Others focus on producing enhanced income.
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I have on an industry expert who
is going to help us understand
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what these new products mean for
financial advisors and investors.
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But first, today's episode is sponsored
by the award winning Zephyr, which
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helps investment professionals
make more informed investment
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decisions behalf of their clients.
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Alright.
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Enough from me.
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I have already talked enough.
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Let's go ahead and move on
to the star of the show.
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My next guest.
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He doesn't need much of an
introduction, but here it is.
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Anyway, I'd like to give a
very warm welcome to Mike Co.
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Mike is the strategist at Yield Max
ETFs in A-C-N-B-C contributor, Mike.
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you so much for coming on the show.
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It's an honor to have you on one.
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A conversation I'm looking
forward to for some time.
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Can you please tell us a little bit
more about yourself and yield Max ETFs?
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Mike Khouw Strategist YieldMax ETFs:
Sure.
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Yeah, so first of all, thank
you very much for having me.
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I really appreciate the opportunity.
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I've spent most of my career.
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In derivatives.
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Trading, I started as a floor
based options specialist and market
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maker on the Philadelphia Stock
Exchange in the mid, late 1990s.
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Since that time, I've focused a lot
of my career on structuring and also
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on educating investors, actually
even educating some of the traders.
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I was part of the training program
at one of the trading firms
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that I worked at called Bluefin
Trading, which still exists.
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As you point out I've been a contributor
on CNBC in 2008, they came up with a
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concept of a show called Options Action
which was the first sort of linear
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business television show about options
trading and that went live January, 2009.
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And they also had hits that would
go on during things like fast money.
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And so I've been doing
that since that time.
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And more recently I joined
Yield Max as a strategist.
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And at Yield Max we focus on single
stock option income ETF products.
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So essentially what we're doing
is giving people democratized.
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Strategy in a stock, if you will, where
we own proxies for the underlying stocks
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and then sell call spreads against it
to generate some options, a premium.
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And then we also run a
number of funds as well.
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We have one that focuses on the top 50
largest companies in the s and p called
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Biggie, appropriately named, which
sells some options premium against the
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basically 80% of the s and p, if you will.
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We have one that we recently
launched called Quad D, which.
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Seeks to essentially double the dividend
of the Dow Jones Dividend Index.
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So that yields about three, three and
a half percent in stock dividends.
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And then we try to create an options
overlay that will, on a net basis,
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add another three to 4% net to that.
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So hopefully getting into the
neighborhood of 7% total yield.
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On that between the dividends
and the options income.
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So a broad swath, we have
over 60 funds overall.
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Ryan: That's fantastic, Mike.
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Couple things there.
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is financial literacy month, so
I love that you brought up the
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education piece to list some options.
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I'm not gonna lie, Mike, I'm a
little, whenever anyone talks about
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single stock option overlays or
products, I get a little hesitant,
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a little bit worried about those
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Mike: Oh.
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Ryan: out there or individual clients.
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I might get into these that aren't
fully aware of what they are and
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some of the risks such as maybe a
nav erosion and stuff like that.
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So we're gonna talk a lot about
that since one of the reasons why
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I'm really excited to have you on.
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Before we get started though,
how's your 2026 acronym?
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Faster holding up.
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Mike: It's going pretty well.
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I think.
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I'm the number two ranked analyst on
CNBC at the moment for the year to date.
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Total returns of about, it was just
shy of 10% after the first quarter.
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So up 9.8%
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I think was the number that I saw.
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In terms of total returns year to
date might be actually a little bit
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higher because the person who did that
calculation, I didn't calculate it myself.
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I don't know that they do an appropriate
total return calculation, and that's
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important for the conversation of
anything that generates incomes,
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because you need to make sure
you get the dividends in there.
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But yeah, so I think I was number two
out of all of those that gave acronyms.
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I didn't win it last year, but
I did manage to win it in 2024.
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Ryan: I love it.
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We've got a long way.
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It's crazy.
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It's April, but we still got a long
ways to go to 2026, so it'll be it.
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Interesting
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Mike: way.
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Ryan: Love it.
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Love it.
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Investors, they're faced
with so much uncertainty.
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Right now we have geopolitical risk,
monetary uncertainty with, a new fed
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chair person coming in here soon.
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Cracks in the labor and market.
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What's your take on the
current macro backdrop?
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Are we still not outta the woods?
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Are there more things
to be concerned about?
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Mike: It's genuinely
a complex environment.
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When, isn't it though, I guess is,
the thing I could say just bringing
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up Kevin Walsh, who you mentioned.
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The new Fed chairperson.
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He hasn't been confirmed yet, but I
expect that he probably will be it's
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a person I have a lot of respect for.
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He is an individual who historically has
expressed some concern about excessively
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dovish monetary policy, and I think that
if we look at the biggest missteps that
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the Fed has taken in my professional life.
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That certainly took place, in
that 2021 to 2024 timeframe.
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Probably actually a little bit I,
by 2024, they had course corrected
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a bit, but I think it's pretty clear
that both treasury and the Fed did
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not fully recognize the inflationary
risks that the economy was facing, and
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they did not respond quickly enough.
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I'm not saying anything controversial.
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I think by saying that, considering
that in that period we saw the highest
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inflation that the nation has seen in 40
years and Kevin Walsh has been critical
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of excessively easy monetary policy.
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And, some of the quantitative easing that
went on, and I think that speaks well to,
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the idea that he will be a steady hand.
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On the tiller, but what are the other
things that we, as investors ought to be
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taking a look at and what really matters?
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Obviously we care about the
other health of the economy,
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which is the economy growing?
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So inflation is one part of it if
we think about the Fed's mandate.
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The other is labor.
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There's a little bit of concern,
I think it would be fair to
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say we, we have seen since.
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There was a big peak in job
creation that took place.
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After we came outta the pandemic,
the economy began to get restarted.
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There was massive job creation,
of course, because there was a
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large bit of unemployment that
resulted from the pandemic.
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The pace of job growth has
slowed very steadily since
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it peaked in also about 2021.
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And some of the revisions
have not been positive.
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In recent months.
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So I think that's a little bit of a
concern, but I think ours is a fairly
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resilient economy, and I think that's
the thing that people need to focus on.
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If there is any economy in the
world that is resilient, it's ours.
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In fact, I would argue that as long as
we don't mismanage it the United States
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is still the best economy in the world.
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And that's not to say that there
aren't others that haven't been
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growing faster or have seen.
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More accelerated growth like China.
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But China has systemic
problems all its own.
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It also has a demographic cliff and
it still has a big lending problem to
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deal with in their real estate market.
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If I think about an economy that can and
should be healthy, assuming we don't get
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into too many other sort of geopolitical
risks around the world, and obviously
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we're dealing with one in the Middle
East right now, but if we can get to
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the far side of that I feel pretty good.
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Ryan: Yeah.
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Fantastic.
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Mike and I completely agree, and
as long as, the consumers and the
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US consumers, they like to spend so
long as they continue spending, I
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think I think we'll be okay there.
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So with that backdrop
that you just mentioned.
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Is it time for financial advisors and
then investors to focus more on cash
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flow rather than price appreciation?
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, Like you said, the economy's been
resilient, but so too has markets, they've
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been resilient over the years and even
when times we think market might pull
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back some, it just on ripping higher.
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So why should investors focus on cash
flow now versus continue just to ride the
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wave and enjoy the price appreciation.
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Mike: I think it's always important
for people to think about cash flow.
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I'm not sure that they always
do, but I think it matters, and
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I like to think about cash flows
in two different ways as an.
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Investor one.
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I'm very interested in whether
the companies themselves are
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generating free cash flow and
if they are, how they deploy it.
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I think that's an important consideration.
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And some of the biggest companies
in the world and in the United
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States have been generating
massive amounts of free cash flow.
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So investors who held them, whether
you held Nvidia, for example
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or alphabet meta, Microsoft.
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You could say, if I'm a young investor and
I'm thinking about the future, and I don't
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need to use that cash flow now, then is
it all right to invest in companies that
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pay a very low dividend or no dividend?
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If they're growing quickly, if they're
growing faster than the economy,
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if their EPS is growing faster than
their top line, and if their free
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cash flow is growing faster as well.
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I think that's fine for those investors
who only need capital appreciation because
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they're not relying on their assets to
provide some measure of income for them.
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There's another reason, and that
is that generally fa higher growth
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companies what we sometimes call
long duration equity, they're also
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gonna tend to be more volatile.
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That might also matter less to younger
investors than it does to older ones.
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But there certainly are a lot of
investors who don't like it when
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their assets are highly volatile.
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There are a lot of investors who are,
one of the reasons that they invested
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was so that their investments could
provide them with an income at some point.
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And the other thing is that income
producing assets or assets that throw off
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distributions are inherently lower risk.
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And to understand that intuitively, just
imagine if you were a bond investor.
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And I said, okay, you can invest in
a bond that's a 20 year zero coupon.
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So you put your money in and
hope you get your money and
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some interest back at the end.
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Or one that pays, biannual coupons, right?
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So the one that's paying biannual coupons
because you're taking cash out of it
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all the time is gonna be, lower risk.
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And I think it's one of the reasons why.
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You're not gonna find a whole lot of banks
that have a zero coupon car loan, for
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example, where you go in to the dealership
today and you buy a car and five years
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from now you owe them all of the principal
back, plus any accumulated interest.
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That, that would certainly be a
riskier car loan to make than one
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where they say, actually we'd like
you to start making monthly payments.
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Ryan: I'm really glad you brought
that up about some investors.
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They, you don't want capital
appreciation, price appreciation.
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The market's a lot different
than, our grandparents market
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and now a lot of growth names
are producing dividends, apple.
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So now some of these investors, they
can get the best of both worlds in
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a sense, at invest in some of these
growth names, but they're also producing
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some, somewhat attractive income
based on the capital appreciation.
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Do you think there's other ways or
other sources that might be suited
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or better suited for equity income
during this market environment or
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macro environment in addition to
just your basic dividend yield?
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Mike: Of course I'm gonna be
talking my own book at this point.
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When I say that I think options overlays
would be a, an intriguing additional
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00:13:12,693 --> 00:13:16,713
source of potential distributions
against an equity portfolio.
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00:13:17,323 --> 00:13:19,033
You mentioned Apple and it's true.
223
00:13:19,033 --> 00:13:22,693
Here's a company that you know, one
of the greatest companies of all time,
224
00:13:22,723 --> 00:13:24,103
and indeed they do pay a dividend.
225
00:13:24,103 --> 00:13:25,153
But here's the problem.
226
00:13:25,603 --> 00:13:29,353
And that is that their annualized dividend
yield is only about 40 basis points.
227
00:13:29,353 --> 00:13:33,103
And if you take a look, I'll look
it up right now, using my handy
228
00:13:33,103 --> 00:13:34,423
dandy Bloomberg terminal here.
229
00:13:34,423 --> 00:13:39,503
If you're looking at the s and p in
general, the, the implied dividend yield
230
00:13:39,503 --> 00:13:42,233
right now for one year is about 1%.
231
00:13:42,723 --> 00:13:48,273
That means you're gonna be getting
about $10,600 per million in income.
232
00:13:48,273 --> 00:13:51,093
That's not a whole lot right now.
233
00:13:51,093 --> 00:13:55,983
If you look at something like the Dow
Jones Dividend Index, then you're gonna
234
00:13:55,983 --> 00:14:00,953
be dealing with all dividend paying stocks
as the name would imply, and so that
235
00:14:01,373 --> 00:14:05,093
yield is going to be higher in that case.
236
00:14:05,093 --> 00:14:09,263
The yield as we speak
right now is about 3.35%.
237
00:14:09,833 --> 00:14:14,513
So you'd be getting about $33,500 for
every million dollars you invested.
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00:14:15,203 --> 00:14:18,803
But if if you have monthly expenses
that are in the, say a hundred thousand
239
00:14:18,803 --> 00:14:23,313
dollars a year range then you're gonna
need to have $3 million invested to
240
00:14:23,313 --> 00:14:25,503
satisfy that cash flow requirement.
241
00:14:25,503 --> 00:14:31,263
Or the alternative would be that you
can put some of your money into bonds
242
00:14:31,263 --> 00:14:34,113
or some other kind of fixed income
and not have some equity exposure.
243
00:14:35,568 --> 00:14:40,568
Bonds over the long run don't
have a terrific track record in
244
00:14:40,568 --> 00:14:44,978
terms of total returns because
money gets devalued by inflation.
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00:14:44,978 --> 00:14:48,788
So it's nice to have an underpinning
basket of equities and that's why
246
00:14:48,788 --> 00:14:50,708
we have strategies like Quad D.
247
00:14:50,708 --> 00:14:53,713
So in Quad D'S case, what you're
doing is you're trying to get
248
00:14:53,768 --> 00:14:58,208
the Dow Jones Industrial dividend
index constituent stocks.
249
00:14:58,388 --> 00:15:00,488
Capturing their 3.35%
250
00:15:00,488 --> 00:15:04,418
dividend yield and then putting in options
overlay on top of it by selling some call
251
00:15:04,418 --> 00:15:10,238
spreads against those stocks that seeks to
about double the dividend on a net basis.
252
00:15:10,238 --> 00:15:15,588
So the objective there would be,
hopefully that you're gonna get nearly 7%.
253
00:15:15,588 --> 00:15:17,058
So double 3.35
254
00:15:17,058 --> 00:15:18,708
would be 6.7%
255
00:15:18,708 --> 00:15:22,048
is what our target distribution
rate on an annual basis.
256
00:15:22,048 --> 00:15:23,578
And then you still own
the underpinning stock.
257
00:15:23,578 --> 00:15:26,458
So you own those stocks,
you collect those dividends.
258
00:15:26,968 --> 00:15:29,668
It for some investors though, will,
those will be viewed as qualified
259
00:15:29,668 --> 00:15:35,058
dividends and then sell some options
strategies around that to, generate
260
00:15:35,058 --> 00:15:36,198
a little bit of extra premium.
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00:15:37,845 --> 00:15:39,255
Ryan: Yeah, that's great Mike.
262
00:15:39,255 --> 00:15:43,635
And you're exactly right in terms,
let's talk about option overlay
263
00:15:43,635 --> 00:15:45,255
strategies here for a second.
264
00:15:45,255 --> 00:15:46,965
They're very popular.
265
00:15:46,995 --> 00:15:48,495
One of the hottest trends in the ETFs.
266
00:15:48,795 --> 00:15:53,085
Based and rightfully they can
really, a big fan of democratization
267
00:15:53,175 --> 00:15:54,525
of investment strategies.
268
00:15:54,525 --> 00:15:58,955
For years, options were, for the
ultra high net worth institutions.
269
00:15:58,955 --> 00:16:05,285
Now, like Yield Max's products, they're
bringing it to retail investors.
270
00:16:05,495 --> 00:16:09,365
Is that trend, this hot trend
in option overlay strategies?
271
00:16:09,365 --> 00:16:15,095
Is it being driven by investors, financial
advisors, or is it just asset managers
272
00:16:15,095 --> 00:16:17,135
trying to enhance their product lineups?
273
00:16:18,473 --> 00:16:21,233
Mike: I think it is a
combination of things.
274
00:16:21,513 --> 00:16:23,533
First of all, options.
275
00:16:24,208 --> 00:16:27,328
Relative to the length and time
of the stock market in the United
276
00:16:27,328 --> 00:16:29,968
States at least, are relatively new.
277
00:16:29,968 --> 00:16:32,358
I think what a lot of people
don't know is that options have
278
00:16:32,358 --> 00:16:34,438
been around for a very long time.
279
00:16:34,858 --> 00:16:39,608
In fact, one could argue that the first
options trades ever done were done
280
00:16:39,693 --> 00:16:45,273
in ancient Greece by Theus of Miletus
on all oppresses back around 600 bc.
281
00:16:45,303 --> 00:16:47,073
But in the United States.
282
00:16:47,673 --> 00:16:51,243
Our first stock exchange was the
Philadelphia Stock Exchange, which was
283
00:16:51,243 --> 00:16:55,953
founded in the late 17 hundreds, and
we didn't have exchange traded options
284
00:16:55,953 --> 00:17:01,473
in the United States until 1973, and
that was only on a handful of stocks.
285
00:17:01,503 --> 00:17:06,762
There were call options only they
listed puts three, four years later.
286
00:17:07,752 --> 00:17:08,742
But they still were.
287
00:17:09,098 --> 00:17:11,558
It was not a really popular product.
288
00:17:11,858 --> 00:17:16,417
Now since I got into the business
in the late 1990s, the compound
289
00:17:16,417 --> 00:17:20,078
annual growth rate of options
volume has been significantly
290
00:17:20,078 --> 00:17:21,488
higher than it has been for stock.
291
00:17:21,488 --> 00:17:26,407
So I think the fact that
we've seen a big increase in
292
00:17:26,407 --> 00:17:28,178
self-directed brokerage platforms.
293
00:17:28,663 --> 00:17:32,113
And also the internet itself has
allowed people to educate themselves.
294
00:17:32,113 --> 00:17:35,203
Every investor who's an auto
didact, who wants to learn about
295
00:17:35,203 --> 00:17:36,883
things now has the opportunity.
296
00:17:36,883 --> 00:17:39,473
You do not have to go and
buy a book about options.
297
00:17:39,853 --> 00:17:40,573
I did write one.
298
00:17:40,573 --> 00:17:42,163
People are welcome to go and buy that.
299
00:17:42,163 --> 00:17:43,723
There are a lot of other good ones too.
300
00:17:44,063 --> 00:17:47,813
Sheldon Berg's Options, volatility
and Pricing is probably one of the
301
00:17:47,813 --> 00:17:49,763
best known amongst Options traders.
302
00:17:49,763 --> 00:17:51,923
McMillan, there's a lot of
good books on the subject, but
303
00:17:51,923 --> 00:17:52,943
you don't need one anymore.
304
00:17:53,723 --> 00:17:57,413
Because information about options
is so readily available and people
305
00:17:57,413 --> 00:17:58,643
can educate themselves about it.
306
00:17:58,643 --> 00:18:00,173
So that's an important driver.
307
00:18:00,243 --> 00:18:00,723
Right there.
308
00:18:00,723 --> 00:18:03,273
Just that options, volumes have taken off.
309
00:18:03,793 --> 00:18:07,183
People are more aware of them
and understand their risks
310
00:18:07,183 --> 00:18:08,323
and benefits much better.
311
00:18:08,623 --> 00:18:09,583
So that's one part of it.
312
00:18:10,363 --> 00:18:14,033
There's another part which is that
ETFs themselves have taken off.
313
00:18:14,648 --> 00:18:19,868
ETFs are generally speaking, a more
cost effective and tax efficient
314
00:18:19,898 --> 00:18:24,638
wrapper for a fund than some other
more traditional approaches have been.
315
00:18:25,328 --> 00:18:30,548
And also because they've been coming
out so fast and furious, there's
316
00:18:30,548 --> 00:18:34,118
just a much wider array of potential
strategies that are in there.
317
00:18:34,748 --> 00:18:36,548
So that played into it as well.
318
00:18:37,268 --> 00:18:40,238
There have been changes in the
rules and the interpretation.
319
00:18:40,238 --> 00:18:40,848
There was some.
320
00:18:41,678 --> 00:18:44,618
Rules as it doesn't really matter what
they were, they'll just tell people.
321
00:18:44,618 --> 00:18:49,218
18 F dash four was a rule
interpretation and clarification that
322
00:18:49,218 --> 00:18:50,598
took place a couple of years ago.
323
00:18:51,258 --> 00:18:56,718
And what it really did was better
laid out the ground rules for
324
00:18:56,808 --> 00:19:00,678
exchange traded products that
use options in their strategy.
325
00:19:01,488 --> 00:19:04,373
And so that allowed
once there was greater.
326
00:19:05,318 --> 00:19:10,118
Clarification on what can and can't
be done, then it allowed for a lot
327
00:19:10,118 --> 00:19:13,738
of these products to come out and
created a lot of innovation, I think.
328
00:19:14,338 --> 00:19:19,828
And so when you put all of those things
together and then also combine that
329
00:19:19,828 --> 00:19:24,638
with, we have an aging population, a lot
of them have a lot of money invested in
330
00:19:24,638 --> 00:19:29,438
the markets, and more of those people
are going to get to a point in their
331
00:19:29,438 --> 00:19:32,618
lives where they are, depending on.
332
00:19:33,368 --> 00:19:37,688
Taking money from their investments rather
than continuing to contribute to their
333
00:19:37,688 --> 00:19:42,798
investments as they transition from being
in the working world to, retirement.
334
00:19:43,188 --> 00:19:47,118
And I think you put all of those
things together and that's one of the
335
00:19:47,118 --> 00:19:50,358
reasons why you're seeing such a huge
growth in these types of products.
336
00:19:50,808 --> 00:19:53,958
The other thing I would say is as big as
these things have become, and they have
337
00:19:53,958 --> 00:19:59,313
become big as a percentage of the overall
exchange traded product market globally.
338
00:20:00,063 --> 00:20:02,643
There's still a relatively small
percentage, big as they are, and
339
00:20:02,693 --> 00:20:07,773
there are options based ETFs out
there that have, individual funds
340
00:20:07,773 --> 00:20:09,663
that have 80, $90 billion in them.
341
00:20:10,173 --> 00:20:12,153
So you could have a
trillion dollars in this.
342
00:20:12,213 --> 00:20:15,633
And then you look at the size and
scale of the market overall and
343
00:20:15,633 --> 00:20:17,583
realize could it get a lot bigger?
344
00:20:17,853 --> 00:20:18,448
It can, and it.
345
00:20:19,585 --> 00:20:20,545
Ryan: Yeah, that's a great point.
346
00:20:20,545 --> 00:20:23,625
I'm glad you brought the,
kind the history of options.
347
00:20:23,955 --> 00:20:25,575
I'm going to age myself here, Mike.
348
00:20:25,575 --> 00:20:26,775
I do that a lot on this show.
349
00:20:27,700 --> 00:20:33,910
When I was kid in high school, my dad,
dabbled in investing and stuff like that.
350
00:20:33,910 --> 00:20:39,710
He had mentioned that he an a call
on I think at the time it was Amgen
351
00:20:40,010 --> 00:20:41,900
and how well it did and stuff.
352
00:20:41,900 --> 00:20:43,400
And at the time it was like options.
353
00:20:43,400 --> 00:20:46,580
He was trying to explain it to
me and I was like, oh my gosh, we
354
00:20:46,580 --> 00:20:48,050
didn't have the internet back then.
355
00:20:48,290 --> 00:20:51,420
So it was like, how, what is an option?
356
00:20:51,420 --> 00:20:53,130
And now it's just gone mainstream.
357
00:20:53,780 --> 00:20:55,190
Especially like during COVID.
358
00:20:55,190 --> 00:20:59,780
I remember COVID, just all the reports
of all the options, the volume of
359
00:20:59,780 --> 00:21:04,670
options just spiking during COVID and
it really hasn't slowed down it seems
360
00:21:04,670 --> 00:21:09,890
and because like you said, the ETFs
now are making it more accessible, so
361
00:21:10,148 --> 00:21:15,548
Mike: Yeah, I think we, I think
yield max trades more options than
362
00:21:15,548 --> 00:21:19,853
the entire options market did when
I first started in this business.
363
00:21:20,930 --> 00:21:21,440
Ryan: Wow.
364
00:21:22,575 --> 00:21:22,995
That's
365
00:21:23,003 --> 00:21:27,263
Mike: That's, I realize that sounds
probably incredible, but that seems
366
00:21:27,263 --> 00:21:30,833
about right because there have been weeks
when we have traded eight or 9 million
367
00:21:30,983 --> 00:21:37,083
options contracts and that would probably
have been more than a lot of weeks than
368
00:21:37,083 --> 00:21:42,253
the entire options market would do in
the 1990s, as, as incredible as that
369
00:21:42,253 --> 00:21:44,263
is, I'm looking right now on, yeah.
370
00:21:44,263 --> 00:21:45,133
So right now.
371
00:21:45,728 --> 00:21:50,528
We're averaging close to
60 million contracts a day.
372
00:21:50,858 --> 00:21:54,458
And to put things in perspective,
for those that don't know much about
373
00:21:54,458 --> 00:21:59,198
options, an options contract usually
represents about a hundred shares.
374
00:22:00,248 --> 00:22:02,798
There can be reasons for corporate
actions and things like that, that's
375
00:22:02,798 --> 00:22:05,048
not the case in in some circumstances.
376
00:22:05,438 --> 00:22:08,468
But most stock options
represent a hundred shares.
377
00:22:08,468 --> 00:22:12,258
So 60 million contracts a day.
378
00:22:13,228 --> 00:22:18,368
That's gonna work out to 6 billion
in round numbers approximately.
379
00:22:18,368 --> 00:22:22,358
That's, you think about that as
options on 6 billion shares a day.
380
00:22:23,018 --> 00:22:23,623
That's a lot of activity.
381
00:22:24,530 --> 00:22:28,905
Ryan: That is a lot of activity and it's
just amazing how just the markets have
382
00:22:28,905 --> 00:22:32,070
evolved over time and it just, how quick.
383
00:22:32,355 --> 00:22:34,845
They move and we talked about it earlier.
384
00:22:34,895 --> 00:22:36,215
It's a fascinating watch.
385
00:22:36,215 --> 00:22:38,795
One of the reasons why I love this
industry is you would just wake
386
00:22:38,795 --> 00:22:40,685
up every day and you have no idea
387
00:22:40,785 --> 00:22:41,535
It's evolved.
388
00:22:42,135 --> 00:22:45,865
Are there certain market environments
we talked about, equity markets
389
00:22:45,865 --> 00:22:47,905
have been very resilient.
390
00:22:48,295 --> 00:22:52,615
Also, macro, the macro dynamics that
you mentioned earlier, there are
391
00:22:52,615 --> 00:22:56,005
certain environments where option
overlay strategies perform better in.
392
00:22:58,933 --> 00:23:03,658
Mike: Yeah, one thing I often like
to say to people is that of course
393
00:23:03,658 --> 00:23:05,578
some market environments are better.
394
00:23:07,163 --> 00:23:09,653
For different stocks, for
different strategies, then other
395
00:23:09,653 --> 00:23:11,813
environments are on a relative basis.
396
00:23:11,813 --> 00:23:16,213
And the reason is that, oftentimes
what you're doing is, squeezing the
397
00:23:16,213 --> 00:23:18,073
risk return balloon, if you will.
398
00:23:18,073 --> 00:23:22,803
So I can grab more from one
part but usually there's some
399
00:23:22,803 --> 00:23:23,943
other kind of a trade off.
400
00:23:25,053 --> 00:23:28,983
I guess the best way to think about it
this way is that these strategies will.
401
00:23:29,358 --> 00:23:32,908
Tend to shine in, three
basic environments.
402
00:23:32,908 --> 00:23:37,858
So flat or sideways markets where
you're not getting a whole lot
403
00:23:37,858 --> 00:23:41,218
out of, and not giving up much
in terms of price appreciation.
404
00:23:41,938 --> 00:23:45,478
That's a place where you're gonna
see, real out performance because
405
00:23:45,598 --> 00:23:48,538
you're gonna be collecting options,
premiums, but you're not really
406
00:23:48,838 --> 00:23:50,608
giving up anything in exchange for it.
407
00:23:50,608 --> 00:23:54,093
On a relative basis, that's going to be.
408
00:23:55,143 --> 00:23:59,063
More outperformance relative to,
just straight, long equities, and
409
00:23:59,063 --> 00:24:00,203
that should make sense to you, right?
410
00:24:00,203 --> 00:24:03,473
So if I buy a stock, I pay a hundred
dollars a share, and I sell an
411
00:24:03,473 --> 00:24:08,173
upside call option against it at,
say the 1 0 5 strike for two bucks
412
00:24:08,773 --> 00:24:11,083
and the stock does nothing well.
413
00:24:11,428 --> 00:24:14,728
After the end of the period, I collected
my two bucks and I do it again.
414
00:24:15,268 --> 00:24:18,658
And so I will have outperformed the
stock by two bucks for that period.
415
00:24:18,718 --> 00:24:21,178
And as many times as I do that,
I will outperform the stock
416
00:24:21,178 --> 00:24:23,278
cumulatively by more and more.
417
00:24:23,848 --> 00:24:26,968
But I think the important thing for
investors to remember is that if this
418
00:24:26,968 --> 00:24:29,278
is my strategy, I still own the stock.
419
00:24:29,818 --> 00:24:31,168
Don't I want the stock to go up?
420
00:24:31,198 --> 00:24:32,938
And the answer is yes.
421
00:24:32,938 --> 00:24:38,798
So I would say to people that,
the ideal circumstance for.
422
00:24:39,368 --> 00:24:43,868
Funds that own stocks or proxies for
stocks and sell some upside premium
423
00:24:43,868 --> 00:24:48,398
against them is that the market's just
marching steadily higher and you're
424
00:24:48,398 --> 00:24:52,298
getting some capital appreciation out
of your stocks and you're generating
425
00:24:52,298 --> 00:24:54,818
some premium from your options overlay.
426
00:24:55,208 --> 00:24:57,428
That's the sweet spot for the strategy.
427
00:24:57,428 --> 00:25:00,158
It, I've heard people say,
oh, the upside is capped.
428
00:25:00,158 --> 00:25:02,768
We sell call spreads, which
means we are short one call
429
00:25:02,768 --> 00:25:04,388
and long another, so we're not.
430
00:25:05,118 --> 00:25:07,278
You're not capping your
upside, but it will be reduced.
431
00:25:07,278 --> 00:25:09,718
That's the balloon squeezing
effect that I'm talking about.
432
00:25:10,078 --> 00:25:12,058
But we are still in the long strategies.
433
00:25:12,058 --> 00:25:13,078
We have some short ones too.
434
00:25:13,498 --> 00:25:16,178
You are rooting for the
underlying stocks to go higher.
435
00:25:16,388 --> 00:25:19,148
One other thing I would just
point out, and that is that, as
436
00:25:19,148 --> 00:25:23,738
time passes, how much people are
willing to pay for options varies.
437
00:25:24,188 --> 00:25:28,268
When things are more volatile,
they'll pay more for options.
438
00:25:28,748 --> 00:25:30,938
And sometimes what that can mean is that.
439
00:25:31,398 --> 00:25:35,418
Depending on how much the market moves
around the relative premium, you're
440
00:25:35,418 --> 00:25:37,038
getting the volatility risk premium.
441
00:25:37,038 --> 00:25:40,998
That's essentially the excess
return you expect to collect
442
00:25:41,028 --> 00:25:43,128
by selling options goes higher.
443
00:25:43,228 --> 00:25:47,413
I was just talking about this earlier
today because with all of the tumult
444
00:25:47,413 --> 00:25:54,403
that's going on in the Middle East right
now one of the questions that came up was.
445
00:25:55,098 --> 00:25:58,248
What, how does realized volatility
compare to implied volatility?
446
00:25:58,303 --> 00:26:01,123
The price of options compare to how
much the market's moving around.
447
00:26:01,873 --> 00:26:06,903
And, I looked back and I saw that about
30 days before, we're talking today,
448
00:26:07,503 --> 00:26:13,173
the implied volatility looking forward
in the s and p 500 was about 22.5%.
449
00:26:13,233 --> 00:26:13,863
Why was that?
450
00:26:13,913 --> 00:26:17,333
Things ha in the Middle East had
just recently conflated, right?
451
00:26:18,308 --> 00:26:20,108
We'd had strikes on Iran.
452
00:26:20,108 --> 00:26:21,338
People got very concerned.
453
00:26:21,368 --> 00:26:25,718
Oil prices shot up, the market
rolled over a bit, and the more
454
00:26:25,718 --> 00:26:28,298
anxious people get, the more they
are willing to pay for options.
455
00:26:29,048 --> 00:26:31,628
And so options, premiums
were much, much higher.
456
00:26:32,258 --> 00:26:37,938
And now we've had a month since
all of this stuff, even more to
457
00:26:37,938 --> 00:26:40,508
look back and say how much did
the market actually move around?
458
00:26:41,018 --> 00:26:43,738
And the market was expecting 22.5%
459
00:26:43,738 --> 00:26:44,578
implied volatility.
460
00:26:44,578 --> 00:26:48,118
That means an annualized standard
deviation of about 22.5%,
461
00:26:48,658 --> 00:26:51,418
and the market realized about 18%.
462
00:26:52,198 --> 00:26:56,728
So that means that options, if we
look at that 30 day window, one month
463
00:26:56,728 --> 00:27:01,108
window, thereabouts, were overpriced
by about four or four and a half
464
00:27:01,258 --> 00:27:05,008
clicks of all which is, about 20%.
465
00:27:05,578 --> 00:27:08,128
So it's been a good time to be.
466
00:27:08,548 --> 00:27:11,488
An option seller, and that's
not always gonna be the case.
467
00:27:11,488 --> 00:27:15,978
Sometimes you get really big
exogenous shocks and sometimes
468
00:27:15,978 --> 00:27:18,198
you just wish you weren't in the
market at all when that happens.
469
00:27:18,198 --> 00:27:19,578
But, and we don't have a crystal ball.
470
00:27:19,578 --> 00:27:25,028
We can't see that coming, but it's in
this way that, sometimes you can benefit,
471
00:27:25,028 --> 00:27:26,738
but from uncertainty a little bit.
472
00:27:27,900 --> 00:27:31,925
Ryan: I, when it's done correctly,
uncertainty, volatility can
473
00:27:31,925 --> 00:27:34,475
be an investor's front, They
474
00:27:34,668 --> 00:27:35,178
Mike: Exactly.
475
00:27:35,405 --> 00:27:35,795
Ryan: of it.
476
00:27:35,795 --> 00:27:39,485
So I'm gl really glad you
brought up both sideways markets.
477
00:27:40,155 --> 00:27:45,165
PE ratio, vol valuations been very high.
478
00:27:45,345 --> 00:27:49,785
So based on that, a lot of people, a lot
of talking analysts predict that, you know
479
00:27:49,785 --> 00:27:53,475
what, for the next couple years, maybe
markets are gonna be a little bit flat.
480
00:27:53,785 --> 00:27:57,835
There's not gonna be 10, 20%
returns that we've seen recently.
481
00:27:58,285 --> 00:28:03,435
So with the valuations high and
past, research that, we could have a
482
00:28:03,435 --> 00:28:07,335
sideways market or we're not gonna see
double digit returns moving forward.
483
00:28:07,335 --> 00:28:11,655
So maybe a good environment here
for some of these option strategies.
484
00:28:13,243 --> 00:28:17,608
Mike: Yeah I don't know which work you're
thinking of when you cite those numbers.
485
00:28:17,608 --> 00:28:21,868
JP Morgan put out a, an
interesting piece recently and I
486
00:28:21,868 --> 00:28:23,038
encourage people to look for it.
487
00:28:23,138 --> 00:28:28,298
It's a scatter diagram basically,
and what it does is it shows the
488
00:28:28,808 --> 00:28:30,548
price to earnings of the s and p.
489
00:28:31,208 --> 00:28:36,098
Plotted against the forward
returns over the subsequent decade.
490
00:28:37,238 --> 00:28:42,578
And as you would expect, the
higher the valuation that you pay
491
00:28:42,578 --> 00:28:47,878
for an investment, the lower it's
expected returns are over time.
492
00:28:48,218 --> 00:28:50,318
Which is exactly what you would expect.
493
00:28:50,318 --> 00:28:53,898
You can imagine that if I have an
investment where I think it's gonna
494
00:28:53,898 --> 00:28:56,668
make 5% a year but then instead of.
495
00:28:57,298 --> 00:29:01,978
Buying it when it implies 5%, I buy it
when it implies four, that my expected
496
00:29:01,978 --> 00:29:04,138
returns are gonna be somewhat less, right?
497
00:29:04,168 --> 00:29:07,138
So if you pay more for the
future earnings, then your return
498
00:29:07,138 --> 00:29:08,998
would necessarily be lower.
499
00:29:08,998 --> 00:29:13,318
The another way to think about this
is that if you take a look at the
500
00:29:13,318 --> 00:29:17,578
returns over the last century or
so, for as close a proxy to the
501
00:29:17,578 --> 00:29:22,988
s and p 500 is we can create, the
long term average annual return.
502
00:29:23,508 --> 00:29:25,728
Is in the mid-high single digits.
503
00:29:26,538 --> 00:29:30,948
Now, we've been getting much, much
better than that over the course
504
00:29:30,948 --> 00:29:32,088
of the last couple of years.
505
00:29:32,898 --> 00:29:39,648
But realistically, can we expect that rate
of constant price appreciation to persist
506
00:29:40,098 --> 00:29:43,518
from, one year to the next indefinitely?
507
00:29:43,828 --> 00:29:46,948
Some mean reversion is to be expected.
508
00:29:47,453 --> 00:29:51,893
The US economy grows probably
what, three and a half, 4% per year
509
00:29:52,453 --> 00:29:57,223
revenues in the s and p probably
grow at six, six and a half percent.
510
00:29:57,913 --> 00:30:04,153
And the compound annual growth rate
for adjusted EPS on the s and p has
511
00:30:04,153 --> 00:30:06,283
probably been close to 8% of late.
512
00:30:07,273 --> 00:30:12,943
At some point, it would be
realistic to assume that your
513
00:30:13,003 --> 00:30:15,103
annual returns would appreciate.
514
00:30:15,688 --> 00:30:19,478
Possibly with the, with, the
average rate of adjusted EPS growth.
515
00:30:19,748 --> 00:30:20,768
That would make sense.
516
00:30:21,278 --> 00:30:25,058
And if that's true, then 20% a
year is probably unrealistic.
517
00:30:25,538 --> 00:30:30,398
And if you are looking to get something
better than the rates of return,
518
00:30:30,458 --> 00:30:32,168
that a mean reversion would imply.
519
00:30:32,708 --> 00:30:35,678
It probably makes some sense to, to
spread your chips around a little
520
00:30:35,678 --> 00:30:39,158
bit and look for some investments
that pay some distributions as well.
521
00:30:39,485 --> 00:30:39,715
Ryan: Yeah.
522
00:30:39,925 --> 00:30:42,685
Yeah, that's a great point, Mike.
523
00:30:43,515 --> 00:30:44,145
Let's go back.
524
00:30:44,145 --> 00:30:47,585
I mentioned at the beginning, I'm a
little bit hesitant about some of these
525
00:30:47,585 --> 00:30:50,735
single stock option overlay strategies.
526
00:30:51,515 --> 00:30:52,865
talk about that for a second.
527
00:30:52,865 --> 00:30:55,205
What should financial advisors consider?
528
00:30:55,205 --> 00:30:58,535
Maybe they're like me, where they're
a little bit hesitant, incorporating
529
00:30:58,535 --> 00:31:00,155
them into their client portfolios.
530
00:31:00,155 --> 00:31:04,775
I often talk a lot about MA alignment,
making sure these products align
531
00:31:04,775 --> 00:31:06,815
with their client's objectives.
532
00:31:07,235 --> 00:31:10,125
What should financial advisors
consider when thinking about.
533
00:31:10,660 --> 00:31:14,350
Incorporating these single
stock option overlay strategies.
534
00:31:15,463 --> 00:31:20,383
Mike: So the single stock options
overlay strategies are basically intended
535
00:31:20,383 --> 00:31:27,553
to be a replacement for affecting an
options overlay on that stock yourself.
536
00:31:27,868 --> 00:31:32,998
So essentially I'm going to allow
people who trade millions of contracts
537
00:31:33,358 --> 00:31:39,038
every week to do my, covered call
spread strategy on Nvidia, for example.
538
00:31:39,398 --> 00:31:43,838
So if you don't wanna manage that strategy
yourself, and there's a lot to ma manage
539
00:31:43,838 --> 00:31:48,913
because you have to adjust the strikes
and roll those positions at least once
540
00:31:48,948 --> 00:31:50,658
a week if you're using weekly options.
541
00:31:51,038 --> 00:31:52,958
If it's a call spread, that's two options.
542
00:31:53,588 --> 00:31:57,228
And it's a whole lot easier of
course for a lot of people to say,
543
00:31:57,228 --> 00:32:03,558
you know what, I'm just gonna buy
Nvidia rather than buy Nvidia and
544
00:32:03,858 --> 00:32:06,588
manage that options process myself.
545
00:32:07,138 --> 00:32:08,998
So that's really who that's intended for.
546
00:32:09,238 --> 00:32:12,418
You already know that you want that
stock and you already know that you
547
00:32:12,418 --> 00:32:14,218
wanna run an option strategy on it.
548
00:32:15,058 --> 00:32:19,108
So that's really who the single
stock strategies are for.
549
00:32:19,613 --> 00:32:23,893
One of the things that I sometimes see
and have heard people say is they will
550
00:32:24,013 --> 00:32:29,023
just comb the universe and say, oh, this
one looks like it has a big distribution.
551
00:32:29,233 --> 00:32:30,313
I'm gonna buy that.
552
00:32:30,553 --> 00:32:36,823
Looking at a single stock options
income strategy product, and thinking
553
00:32:36,823 --> 00:32:40,423
of it kind of the way you might have
historically thought about a mutual
554
00:32:40,423 --> 00:32:41,953
fund, that's not what these are.
555
00:32:42,478 --> 00:32:48,028
These are strategies on stocks that you
can deploy, essentially democratizing
556
00:32:48,028 --> 00:32:52,228
a strategy that logistically would be
too difficult to affect for yourself.
557
00:32:52,588 --> 00:32:56,398
So if you have that stock and you
know you wanna run an options income
558
00:32:56,398 --> 00:33:01,198
overlay strategy against it, the ETF
might be a better solution for you
559
00:33:01,408 --> 00:33:04,168
in terms of much e, lower complexity.
560
00:33:04,663 --> 00:33:07,993
Perhaps there might even end up being
some tax efficiency in it for you.
561
00:33:08,263 --> 00:33:10,093
And it trades with the
convenience of a stock.
562
00:33:10,093 --> 00:33:11,983
So that's really who those are for.
563
00:33:12,793 --> 00:33:16,693
We also have diversified portfolios
though, so if you just want to do
564
00:33:17,353 --> 00:33:20,533
semiconductors, then you would do
something like a chippy or a soi.
565
00:33:20,843 --> 00:33:23,913
If you were looking for the,
large cap equities, then it
566
00:33:23,913 --> 00:33:25,903
would be something like biggie.
567
00:33:26,053 --> 00:33:30,553
And that's more of an
investment in the strategy.
568
00:33:31,573 --> 00:33:37,273
Pre diversified, whereas the single
stock strategies are basically, I like
569
00:33:37,273 --> 00:33:41,503
that stock and I wanna run an options
income overlay strategy against it, and
570
00:33:41,503 --> 00:33:43,063
I'm gonna let these guys do it for me.
571
00:33:44,230 --> 00:33:44,920
Ryan: Yeah, that's great.
572
00:33:44,920 --> 00:33:48,320
And a lot of, especially on the tech
side, these tech companies, a other
573
00:33:48,320 --> 00:33:55,360
employees might have a overweight in their
firm's employee stock option plan that
574
00:33:55,450 --> 00:34:00,490
I'm assuming these single stock option
strategies can help hedge against that.
575
00:34:00,490 --> 00:34:01,990
There's some other strategies.
576
00:34:02,305 --> 00:34:06,355
There that can diversify that portfolio,
maybe hedge against that single stock
577
00:34:06,355 --> 00:34:11,465
risk of having a portion of your
portfolio in your company's stock.
578
00:34:12,632 --> 00:34:15,813
Mike: Yeah, it's funny that you should
mention that I have spoken to people who
579
00:34:15,813 --> 00:34:20,763
have heavily concentrated core equity
positions that want to use options,
580
00:34:20,763 --> 00:34:22,652
overlays specifically for that reason.
581
00:34:23,112 --> 00:34:28,513
I've spoken to people who have worked
for and have retired from, and then
582
00:34:28,513 --> 00:34:31,882
that's an important point I would make
because if you're a current employee.
583
00:34:32,243 --> 00:34:35,333
And you're receiving RSUs
restricted stock units.
584
00:34:35,763 --> 00:34:40,953
You may or may not be permitted to, to
trade options overlays, but I have spoken
585
00:34:40,953 --> 00:34:46,453
to people who, for example, worked at
Nvidia retired several years ago, held
586
00:34:46,453 --> 00:34:52,183
on to some of their stock, never realized
what that stock was going to do and have
587
00:34:52,183 --> 00:34:55,063
generated seriously generational wealth.
588
00:34:55,103 --> 00:34:57,083
I've directly spoken to people who.
589
00:34:57,648 --> 00:35:02,148
Have made hundreds of millions of
dollars in that company just that one.
590
00:35:02,718 --> 00:35:07,428
And now are aggressively looking
at options overlay strategies.
591
00:35:08,448 --> 00:35:10,728
'cause they're interested
really in two things.
592
00:35:11,088 --> 00:35:18,198
One, they want to generate some income
and Nvidia doesn't pay a big dividend.
593
00:35:18,198 --> 00:35:21,698
So they, they can't just hold the
shares and wait for a quarterly
594
00:35:21,698 --> 00:35:23,648
dividend to support their lives.
595
00:35:23,648 --> 00:35:24,578
And in many cases.
596
00:35:25,388 --> 00:35:29,198
As their net worth swelled
because these stocks appreciated
597
00:35:30,008 --> 00:35:31,508
so too did their lifestyle.
598
00:35:31,818 --> 00:35:39,448
So people who once upon a time might've
lived on $300,000 a year now live on, I'm
599
00:35:39,448 --> 00:35:41,688
not kidding, $300,000 a month, let's say.
600
00:35:42,168 --> 00:35:48,048
And they can sell off shares of the stock
to do that, but oftentimes that's not
601
00:35:48,048 --> 00:35:51,078
what they want to do because it has a tax
consequence if they sell their shares.
602
00:35:51,378 --> 00:35:52,368
And secondly.
603
00:35:53,403 --> 00:35:55,443
This is a refrain I hear all the time.
604
00:35:55,533 --> 00:35:59,523
They say, every single time I thought
I, I should sell some stock and didn't.
605
00:35:59,523 --> 00:36:00,693
I'm so glad I did not.
606
00:36:00,693 --> 00:36:03,603
So they've actually gotten
to the point where they don't
607
00:36:03,603 --> 00:36:04,623
know what the stock's gonna do.
608
00:36:04,623 --> 00:36:07,903
They're afraid to sell it because
they don't want the tax consequence.
609
00:36:07,903 --> 00:36:10,603
And also, by the way, Invidia
being based in California, if
610
00:36:10,603 --> 00:36:13,693
you're a California resident, you
are a Cal California resident.
611
00:36:13,693 --> 00:36:14,263
I think.
612
00:36:14,503 --> 00:36:16,633
You might be on the, in, in Nevada side.
613
00:36:16,783 --> 00:36:17,773
I am in California.
614
00:36:18,493 --> 00:36:20,443
The tax laws are not particularly.
615
00:36:20,803 --> 00:36:25,663
Friendly if you are selling appreciated
stock because they don't have a
616
00:36:25,663 --> 00:36:27,223
concept of long-term capital gain.
617
00:36:27,223 --> 00:36:28,963
So it's not tax advice.
618
00:36:28,963 --> 00:36:32,233
I'm not a tax lawyer or an
accountant seek your own tax advice.
619
00:36:32,473 --> 00:36:36,373
But I will tell you that I do know
a lot of people who have appreciated
620
00:36:36,373 --> 00:36:40,083
stock holdings that are using options
overlay strategies to generate
621
00:36:40,573 --> 00:36:44,353
distributions off of their core
holdings without selling those holdings.
622
00:36:44,353 --> 00:36:46,393
And in some cases also to
hedge them a little bit.
623
00:36:46,748 --> 00:36:51,878
If you sell premium against an equity
portfolio, you're effectively reducing
624
00:36:51,878 --> 00:36:53,888
your basis through the course of time.
625
00:36:54,368 --> 00:36:55,358
Is that a complete hedge?
626
00:36:55,478 --> 00:36:55,928
No.
627
00:36:56,228 --> 00:36:58,088
Does it mute the downside of it?
628
00:36:58,328 --> 00:36:58,628
Yes.
629
00:37:00,285 --> 00:37:01,815
Ryan: Yeah, Mike, that's great.
630
00:37:01,815 --> 00:37:04,245
I love that example
too, because especially.
631
00:37:05,155 --> 00:37:10,425
with concentration risk, I'm sure a lot of
portfolios out there are, heavily weighted
632
00:37:10,425 --> 00:37:14,955
to whether it's the MEG seven or the
mega tech, or in your case, like we were
633
00:37:14,955 --> 00:37:17,025
talking about, just the individual stock.
634
00:37:17,275 --> 00:37:19,255
So great insight there.
635
00:37:19,285 --> 00:37:20,185
Lastly.
636
00:37:21,265 --> 00:37:23,395
Financial advisors go back to them.
637
00:37:24,355 --> 00:37:25,645
What do you tell them?
638
00:37:25,645 --> 00:37:28,885
And people like me, what do you tell
them when they think these strategies,
639
00:37:28,885 --> 00:37:32,605
particularly the single stock
option, they're just too complicated,
640
00:37:32,605 --> 00:37:34,975
too risky, implied volatility.
641
00:37:34,975 --> 00:37:36,745
Just another thing they
need to think about.
642
00:37:36,895 --> 00:37:40,880
They have nav erosion they heard
about, it's I don't wanna touch these.
643
00:37:41,345 --> 00:37:44,010
What do you tell those
financial advisors about these?
644
00:37:44,010 --> 00:37:47,040
That maybe there's some
misconceptions out there to get
645
00:37:47,040 --> 00:37:48,570
over 'em and that you know what?
646
00:37:48,570 --> 00:37:50,370
They are good strategies for a portfolio.
647
00:37:51,908 --> 00:37:54,218
Mike: Yeah, I guess I would
say a couple different things.
648
00:37:54,218 --> 00:38:00,188
First of all number one, if you're
looking at options, income strategies in
649
00:38:00,188 --> 00:38:05,078
general, and you're not a stock picker,
and look, some, a lot of investment
650
00:38:05,078 --> 00:38:06,698
advisors are also not stock pickers.
651
00:38:06,698 --> 00:38:10,958
They may be picking stocks or
they may have stocks selected by
652
00:38:10,958 --> 00:38:14,998
their clients who say, I want to
own this, I heard a great thing.
653
00:38:14,998 --> 00:38:18,838
I don't know whether they heard it at
the barber shop or they heard it from
654
00:38:18,838 --> 00:38:22,128
their best friend, or, they've been
reading the paper and they have an idea
655
00:38:22,128 --> 00:38:23,598
that they want to be in a certain stock.
656
00:38:24,138 --> 00:38:28,608
Sometimes individuals have their own ideas
and sometimes they're right to have those
657
00:38:28,608 --> 00:38:32,598
ideas, and if they have selected a stock.
658
00:38:33,033 --> 00:38:37,503
And they would like to run an options
income strategy, then the single stock
659
00:38:37,503 --> 00:38:39,513
strategies might be an appropriate case.
660
00:38:39,513 --> 00:38:44,913
If an advisor has a strong conviction in
a given underlying stock and is tracking
661
00:38:44,913 --> 00:38:49,583
options, prices and says, I like the
stock technically right here, it feels
662
00:38:49,583 --> 00:38:53,123
like it's probably gonna be range bound,
but the options premiums are high.
663
00:38:53,543 --> 00:38:57,563
I think we want to run an options overlay
strategy against the stock, but I'm
664
00:38:57,563 --> 00:38:59,793
not going to, I'm talking to clients.
665
00:39:00,093 --> 00:39:02,163
I am doing a lot of other things.
666
00:39:02,463 --> 00:39:06,243
I can buy a strategy like this and
I'm gonna allow people who do a lot
667
00:39:06,243 --> 00:39:09,363
of options trading to manage that
for me, I think that's a great case.
668
00:39:10,083 --> 00:39:15,753
I think also it's not a bad idea for
people though to have allocations to
669
00:39:15,933 --> 00:39:20,463
the more diversified products, the
ones that run a diversified strategy
670
00:39:20,493 --> 00:39:25,253
and have an options overlay strategy
against that to generate some income.
671
00:39:25,493 --> 00:39:27,113
The example I would provide.
672
00:39:28,028 --> 00:39:32,588
And I think this is illustrative is that,
as I previously pointed out something
673
00:39:32,688 --> 00:39:37,188
like our large cap 50, so I'm just, I'm
going to u use my Bloomberg terminal now.
674
00:39:37,188 --> 00:39:43,168
I'm just gonna compare what it did
versus the s and p, which, is essentially
675
00:39:43,588 --> 00:39:45,938
gonna behave a lot like it last year.
676
00:39:45,938 --> 00:39:52,634
So looking from December 31st,
2024 through December 31st, 2025.
677
00:39:53,273 --> 00:39:53,303
Okay.
678
00:39:54,443 --> 00:40:00,893
And if you look at that so
the s and p saw a 16.35%
679
00:40:00,893 --> 00:40:05,543
price appreciation from December from
the end of 2024, last trading day of
680
00:40:05,673 --> 00:40:07,833
24 to the last trading day of 2025.
681
00:40:07,983 --> 00:40:10,893
So if you brought spy, let's say that's
probably the biggest proxy, everybody
682
00:40:10,893 --> 00:40:13,383
knows that you'd have seen 16.35%
683
00:40:13,783 --> 00:40:17,923
price appreciation, and your total
returns would've been higher.
684
00:40:17,923 --> 00:40:20,233
You would've gotten 17.72%.
685
00:40:20,953 --> 00:40:21,793
What's the difference?
686
00:40:21,983 --> 00:40:22,853
Remember what I said.
687
00:40:22,883 --> 00:40:27,063
The s and p is giving you a
dividend yield of about 1%.
688
00:40:27,063 --> 00:40:29,763
Now, it was slightly higher
last year, a little over 1%.
689
00:40:29,763 --> 00:40:31,953
So the difference, 1.4
690
00:40:32,073 --> 00:40:34,113
ish percent was the dividends.
691
00:40:34,383 --> 00:40:38,433
So you bought stock, they went
up 16%, and then you got a
692
00:40:38,433 --> 00:40:39,603
little over 1% in dividends.
693
00:40:39,628 --> 00:40:41,028
And that's a great outcome, right?
694
00:40:41,538 --> 00:40:45,328
But for some people, that dividend
distribution wasn't sufficient.
695
00:40:45,628 --> 00:40:48,208
Biggie nearly tracked.
696
00:40:48,538 --> 00:40:52,768
Step for step how the s and p
behaved, because 80% of it is
697
00:40:52,768 --> 00:40:54,388
the exact same underlying stocks.
698
00:40:55,138 --> 00:40:58,108
So you're gonna have those stocks,
you're gonna get those dividends,
699
00:40:58,558 --> 00:41:01,408
but then additionally, you're
selling some options premium.
700
00:41:01,408 --> 00:41:06,748
So biggie's price appreciation
for 2025 was 4.5%.
701
00:41:06,928 --> 00:41:09,958
Now remember what I said for spy 16.3,
702
00:41:10,228 --> 00:41:11,248
16.4.
703
00:41:11,803 --> 00:41:13,633
Biggie appreciated 4.5%,
704
00:41:13,633 --> 00:41:16,003
but your total returns were over 19%.
705
00:41:16,303 --> 00:41:20,423
And that's because it's been paying
out distribution all of this time.
706
00:41:20,723 --> 00:41:24,713
And that distribution was more
than 14% of your initial investment
707
00:41:24,983 --> 00:41:26,393
throughout the course of the year.
708
00:41:27,103 --> 00:41:31,363
And I think that's really the point
that I would make for people is
709
00:41:31,363 --> 00:41:36,973
that you can choose a strategy that
will behave more like the underlying
710
00:41:36,973 --> 00:41:39,413
stocks or almost exactly like them.
711
00:41:40,078 --> 00:41:43,378
Quad D will behave a lot like the stocks
and get a little bit of options income,
712
00:41:44,218 --> 00:41:47,608
or you can get something that behaves
where your total returns are similar
713
00:41:47,608 --> 00:41:51,358
to stocks, but your price appreciation
isn't gonna be as much, but you're gonna
714
00:41:51,358 --> 00:41:52,768
get regular distributions like Biggie.
715
00:41:53,098 --> 00:41:55,408
Or you can just say, I love Nvidia.
716
00:41:55,528 --> 00:41:57,448
I wanna run in options
income strategy on that.
717
00:41:57,448 --> 00:42:00,748
So I'm gonna pick something like
NVD and that's gonna be mostly about
718
00:42:00,748 --> 00:42:04,668
getting distributions, but your nav
is, that's the trade off you're making.
719
00:42:04,908 --> 00:42:06,558
How much appreciation do you want?
720
00:42:06,918 --> 00:42:08,838
Versus how much distributions do you want?
721
00:42:09,018 --> 00:42:12,678
The more distributions you want,
the underlying asset's gonna
722
00:42:12,678 --> 00:42:14,568
have to really perform well.
723
00:42:14,668 --> 00:42:16,678
For to see considerable
price appreciation.
724
00:42:16,678 --> 00:42:19,408
And we did see that in, in
semis last year, but that's
725
00:42:19,408 --> 00:42:20,458
not gonna happen every year.
726
00:42:20,668 --> 00:42:25,928
There's, I've never seen a sector
that goes up 50, 60% year after year.
727
00:42:26,765 --> 00:42:28,655
Ryan: I wish there was Mike.
728
00:42:28,655 --> 00:42:28,985
I wish
729
00:42:29,133 --> 00:42:29,433
Mike: Oh yeah.
730
00:42:29,433 --> 00:42:30,183
Wouldn't that be great?
731
00:42:30,890 --> 00:42:32,240
Ryan: it would be fantastic.
732
00:42:33,530 --> 00:42:37,640
Mike, I knew it was gonna be a
really fun conversation and it was.
733
00:42:37,700 --> 00:42:40,220
Thank you for bringing
so much great insight.
734
00:42:40,220 --> 00:42:40,490
Really.
735
00:42:40,490 --> 00:42:44,025
It's been an honor on
a very important topic.
736
00:42:44,025 --> 00:42:48,585
Like you said, demographics, people are
aging, income is more important than
737
00:42:48,585 --> 00:42:54,995
ever now in such a great topic that,
another strategy that can help investors.
738
00:42:55,790 --> 00:42:57,230
During their retirement age.
739
00:42:57,650 --> 00:42:59,870
It was such a fun conversation.
740
00:42:59,930 --> 00:43:00,620
Thank you, Mike.
741
00:43:00,620 --> 00:43:05,330
Where can our audience get more
information about yield Max ETFs?
742
00:43:06,148 --> 00:43:10,198
Mike: The best place to go for
sure would be yield max etfs.com.
743
00:43:10,198 --> 00:43:12,718
We have all the information
about all the respective funds.
744
00:43:12,718 --> 00:43:14,308
All the tax information is there.
745
00:43:14,638 --> 00:43:18,178
You can actually go and see the
holdings of every single fund.
746
00:43:18,178 --> 00:43:19,288
They're updated every night.
747
00:43:19,288 --> 00:43:20,458
There you can see the transac.
748
00:43:20,458 --> 00:43:23,633
That took place, and that's a
really great place to get started.
749
00:43:24,850 --> 00:43:27,490
Ryan: Unlike what some people may
believe, I do some research here.
750
00:43:27,490 --> 00:43:29,830
Mike and I did check out yield Max.
751
00:43:29,830 --> 00:43:33,820
You guys do have a lot of great
insight and I love the transparency.
752
00:43:34,720 --> 00:43:35,560
So important.
753
00:43:35,890 --> 00:43:37,750
I love the transparency on the website.
754
00:43:38,380 --> 00:43:42,460
So thank you and thank you so much
for listening to this episode of
755
00:43:42,460 --> 00:43:44,740
Zephyr Adjusted for Risk podcast.
756
00:43:44,740 --> 00:43:49,210
You can watch all of our other episodes
on the Zephyr YouTube channel, all the
757
00:43:49,210 --> 00:43:53,200
other platforms that you may listen to
your favorite podcasts on, and please
758
00:43:53,200 --> 00:43:57,100
be sure to like and subscribe to those
channels and give us a follow on LinkedIn.
759
00:43:57,400 --> 00:44:00,280
Thank you very much and have
a great rest of your week.
