How to Use Options to Generate Income and Protect Your Downside
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
Transcript
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:
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:Since that time, I've focused a lot
of my career on structuring and also
35
: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:
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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
g and that went live January,:
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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:
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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:
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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:
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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:
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:Probably actually a little bit I,
by:
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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.
129
: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
177
: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.
189
: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
206
: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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:source of potential distributions
against an equity portfolio.
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:You mentioned Apple and it's true.
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:Here's a company that you know, one
of the greatest companies of all time,
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:and indeed they do pay a dividend.
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:But here's the problem.
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:And that is that their annualized dividend
yield is only about 40 basis points.
227
:And if you take a look, I'll look
it up right now, using my handy
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:dandy Bloomberg terminal here.
229
:If you're looking at the s and p in
general, the, the implied dividend yield
230
:right now for one year is about 1%.
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:That means you're gonna be getting
about $10,600 per million in income.
232
:That's not a whole lot right now.
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:If you look at something like the Dow
Jones Dividend Index, then you're gonna
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:be dealing with all dividend paying stocks
as the name would imply, and so that
235
:yield is going to be higher in that case.
236
:The yield as we speak
right now is about 3.35%.
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:So you'd be getting about $33,500 for
every million dollars you invested.
238
:But if if you have monthly expenses
that are in the, say a hundred thousand
239
:dollars a year range then you're gonna
need to have $3 million invested to
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:satisfy that cash flow requirement.
241
:Or the alternative would be that you
can put some of your money into bonds
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:or some other kind of fixed income
and not have some equity exposure.
243
:Bonds over the long run don't
have a terrific track record in
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:terms of total returns because
money gets devalued by inflation.
245
:So it's nice to have an underpinning
basket of equities and that's why
246
:we have strategies like Quad D.
247
:So in Quad D'S case, what you're
doing is you're trying to get
248
:the Dow Jones Industrial dividend
index constituent stocks.
249
:Capturing their 3.35%
250
:dividend yield and then putting in options
overlay on top of it by selling some call
251
:spreads against those stocks that seeks to
about double the dividend on a net basis.
252
:So the objective there would be,
hopefully that you're gonna get nearly 7%.
253
:So double 3.35
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:would be 6.7%
255
:is what our target distribution
rate on an annual basis.
256
:And then you still own
the underpinning stock.
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:So you own those stocks,
you collect those dividends.
258
:It for some investors though, will,
those will be viewed as qualified
259
:dividends and then sell some options
strategies around that to, generate
260
:a little bit of extra premium.
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:Ryan: Yeah, that's great Mike.
262
:And you're exactly right in terms,
let's talk about option overlay
263
:strategies here for a second.
264
:They're very popular.
265
:One of the hottest trends in the ETFs.
266
:Based and rightfully they can
really, a big fan of democratization
267
:of investment strategies.
268
:For years, options were, for the
ultra high net worth institutions.
269
:Now, like Yield Max's products, they're
bringing it to retail investors.
270
:Is that trend, this hot trend
in option overlay strategies?
271
:Is it being driven by investors, financial
advisors, or is it just asset managers
272
:trying to enhance their product lineups?
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:Mike: I think it is a
combination of things.
274
:First of all, options.
275
:Relative to the length and time
of the stock market in the United
276
:States at least, are relatively new.
277
:I think what a lot of people
don't know is that options have
278
:been around for a very long time.
279
:In fact, one could argue that the first
options trades ever done were done
280
:in ancient Greece by Theus of Miletus
on all oppresses back around 600 bc.
281
:But in the United States.
282
:Our first stock exchange was the
Philadelphia Stock Exchange, which was
283
:founded in the late 17 hundreds, and
we didn't have exchange traded options
284
:in the United States until 1973, and
that was only on a handful of stocks.
285
:There were call options only they
listed puts three, four years later.
286
:But they still were.
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:It was not a really popular product.
288
:Now since I got into the business
in the late:
289
:annual growth rate of options
volume has been significantly
290
:higher than it has been for stock.
291
:So I think the fact that
we've seen a big increase in
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:self-directed brokerage platforms.
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:And also the internet itself has
allowed people to educate themselves.
294
:Every investor who's an auto
didact, who wants to learn about
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:things now has the opportunity.
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:You do not have to go and
buy a book about options.
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:I did write one.
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:People are welcome to go and buy that.
299
:There are a lot of other good ones too.
300
:Sheldon Berg's Options, volatility
and Pricing is probably one of the
301
:best known amongst Options traders.
302
:McMillan, there's a lot of
good books on the subject, but
303
:you don't need one anymore.
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:Because information about options
is so readily available and people
305
:can educate themselves about it.
306
:So that's an important driver.
307
:Right there.
308
:Just that options, volumes have taken off.
309
:People are more aware of them
and understand their risks
310
:and benefits much better.
311
:So that's one part of it.
312
:There's another part which is that
ETFs themselves have taken off.
313
:ETFs are generally speaking, a more
cost effective and tax efficient
314
:wrapper for a fund than some other
more traditional approaches have been.
315
:And also because they've been coming
out so fast and furious, there's
316
:just a much wider array of potential
strategies that are in there.
317
:So that played into it as well.
318
:There have been changes in the
rules and the interpretation.
319
:There was some.
320
:Rules as it doesn't really matter what
they were, they'll just tell people.
321
:18 F dash four was a rule
interpretation and clarification that
322
:took place a couple of years ago.
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:And what it really did was better
laid out the ground rules for
324
:exchange traded products that
use options in their strategy.
325
:And so that allowed
once there was greater.
326
:Clarification on what can and can't
be done, then it allowed for a lot
327
:of these products to come out and
created a lot of innovation, I think.
328
:And so when you put all of those things
together and then also combine that
329
:with, we have an aging population, a lot
of them have a lot of money invested in
330
:the markets, and more of those people
are going to get to a point in their
331
:lives where they are, depending on.
332
:Taking money from their investments rather
than continuing to contribute to their
333
:investments as they transition from being
in the working world to, retirement.
334
:And I think you put all of those
things together and that's one of the
335
:reasons why you're seeing such a huge
growth in these types of products.
336
:The other thing I would say is as big as
these things have become, and they have
337
:become big as a percentage of the overall
exchange traded product market globally.
338
:There's still a relatively small
percentage, big as they are, and
339
:there are options based ETFs out
there that have, individual funds
340
:that have 80, $90 billion in them.
341
:So you could have a
trillion dollars in this.
342
:And then you look at the size and
scale of the market overall and
343
:realize could it get a lot bigger?
344
:It can, and it.
345
:Ryan: Yeah, that's a great point.
346
:I'm glad you brought the,
kind the history of options.
347
:I'm going to age myself here, Mike.
348
:I do that a lot on this show.
349
:When I was kid in high school, my dad,
dabbled in investing and stuff like that.
350
:He had mentioned that he an a call
on I think at the time it was Amgen
351
:and how well it did and stuff.
352
:And at the time it was like options.
353
:He was trying to explain it to
me and I was like, oh my gosh, we
354
:didn't have the internet back then.
355
:So it was like, how, what is an option?
356
:And now it's just gone mainstream.
357
:Especially like during COVID.
358
:I remember COVID, just all the reports
of all the options, the volume of
359
:options just spiking during COVID and
it really hasn't slowed down it seems
360
:and because like you said, the ETFs
now are making it more accessible, so
361
:Mike: Yeah, I think we, I think
yield max trades more options than
362
:the entire options market did when
I first started in this business.
363
:Ryan: Wow.
364
:That's
365
:Mike: That's, I realize that sounds
probably incredible, but that seems
366
:about right because there have been weeks
when we have traded eight or 9 million
367
:options contracts and that would probably
have been more than a lot of weeks than
368
:the entire options market would do in
the:
369
:is, I'm looking right now on, yeah.
370
:So right now.
371
:We're averaging close to
60 million contracts a day.
372
:And to put things in perspective,
for those that don't know much about
373
:options, an options contract usually
represents about a hundred shares.
374
:There can be reasons for corporate
actions and things like that, that's
375
:not the case in in some circumstances.
376
:But most stock options
represent a hundred shares.
377
:So 60 million contracts a day.
378
:That's gonna work out to 6 billion
in round numbers approximately.
379
:That's, you think about that as
options on 6 billion shares a day.
380
:That's a lot of activity.
381
:Ryan: That is a lot of activity and it's
just amazing how just the markets have
382
:evolved over time and it just, how quick.
383
:They move and we talked about it earlier.
384
:It's a fascinating watch.
385
:One of the reasons why I love this
industry is you would just wake
386
:up every day and you have no idea
387
:It's evolved.
388
:Are there certain market environments
we talked about, equity markets
389
:have been very resilient.
390
:Also, macro, the macro dynamics that
you mentioned earlier, there are
391
:certain environments where option
overlay strategies perform better in.
392
:Mike: Yeah, one thing I often like
to say to people is that of course
393
:some market environments are better.
394
:For different stocks, for
different strategies, then other
395
:environments are on a relative basis.
396
:And the reason is that, oftentimes
what you're doing is, squeezing the
397
:risk return balloon, if you will.
398
:So I can grab more from one
part but usually there's some
399
:other kind of a trade off.
400
:I guess the best way to think about it
this way is that these strategies will.
401
:Tend to shine in, three
basic environments.
402
:So flat or sideways markets where
you're not getting a whole lot
403
:out of, and not giving up much
in terms of price appreciation.
404
:That's a place where you're gonna
see, real out performance because
405
:you're gonna be collecting options,
premiums, but you're not really
406
:giving up anything in exchange for it.
407
:On a relative basis, that's going to be.
408
:More outperformance relative to,
just straight, long equities, and
409
:that should make sense to you, right?
410
:So if I buy a stock, I pay a hundred
dollars a share, and I sell an
411
:upside call option against it at,
say the 1 0 5 strike for two bucks
412
:and the stock does nothing well.
413
:After the end of the period, I collected
my two bucks and I do it again.
414
:And so I will have outperformed the
stock by two bucks for that period.
415
:And as many times as I do that,
I will outperform the stock
416
:cumulatively by more and more.
417
:But I think the important thing for
investors to remember is that if this
418
:is my strategy, I still own the stock.
419
:Don't I want the stock to go up?
420
:And the answer is yes.
421
:So I would say to people that,
the ideal circumstance for.
422
:Funds that own stocks or proxies for
stocks and sell some upside premium
423
:against them is that the market's just
marching steadily higher and you're
424
:getting some capital appreciation out
of your stocks and you're generating
425
:some premium from your options overlay.
426
:That's the sweet spot for the strategy.
427
:It, I've heard people say,
oh, the upside is capped.
428
:We sell call spreads, which
means we are short one call
429
:and long another, so we're not.
430
:You're not capping your
upside, but it will be reduced.
431
:That's the balloon squeezing
effect that I'm talking about.
432
:But we are still in the long strategies.
433
:We have some short ones too.
434
:You are rooting for the
underlying stocks to go higher.
435
:One other thing I would just
point out, and that is that, as
436
:time passes, how much people are
willing to pay for options varies.
437
:When things are more volatile,
they'll pay more for options.
438
:And sometimes what that can mean is that.
439
:Depending on how much the market moves
around the relative premium, you're
440
:getting the volatility risk premium.
441
:That's essentially the excess
return you expect to collect
442
:by selling options goes higher.
443
:I was just talking about this earlier
today because with all of the tumult
444
:that's going on in the Middle East right
now one of the questions that came up was.
445
:What, how does realized volatility
compare to implied volatility?
446
:The price of options compare to how
much the market's moving around.
447
:And, I looked back and I saw that about
30 days before, we're talking today,
448
:the implied volatility looking forward
in the s and p 500 was about 22.5%.
449
:Why was that?
450
:Things ha in the Middle East had
just recently conflated, right?
451
:We'd had strikes on Iran.
452
:People got very concerned.
453
:Oil prices shot up, the market
rolled over a bit, and the more
454
:anxious people get, the more they
are willing to pay for options.
455
:And so options, premiums
were much, much higher.
456
:And now we've had a month since
all of this stuff, even more to
457
:look back and say how much did
the market actually move around?
458
:And the market was expecting 22.5%
459
:implied volatility.
460
:That means an annualized standard
deviation of about 22.5%,
461
:and the market realized about 18%.
462
:So that means that options, if we
look at that 30 day window, one month
463
:window, thereabouts, were overpriced
by about four or four and a half
464
:clicks of all which is, about 20%.
465
:So it's been a good time to be.
466
:An option seller, and that's
not always gonna be the case.
467
:Sometimes you get really big
exogenous shocks and sometimes
468
:you just wish you weren't in the
market at all when that happens.
469
:But, and we don't have a crystal ball.
470
:We can't see that coming, but it's in
this way that, sometimes you can benefit,
471
:but from uncertainty a little bit.
472
:Ryan: I, when it's done correctly,
uncertainty, volatility can
473
:be an investor's front, They
474
:Mike: Exactly.
475
:Ryan: of it.
476
:So I'm gl really glad you
brought up both sideways markets.
477
:PE ratio, vol valuations been very high.
478
:So based on that, a lot of people, a lot
of talking analysts predict that, you know
479
:what, for the next couple years, maybe
markets are gonna be a little bit flat.
480
:There's not gonna be 10, 20%
returns that we've seen recently.
481
:So with the valuations high and
past, research that, we could have a
482
:sideways market or we're not gonna see
double digit returns moving forward.
483
:So maybe a good environment here
for some of these option strategies.
484
:Mike: Yeah I don't know which work you're
thinking of when you cite those numbers.
485
:JP Morgan put out a, an
interesting piece recently and I
486
:encourage people to look for it.
487
:It's a scatter diagram basically,
and what it does is it shows the
488
:price to earnings of the s and p.
489
:Plotted against the forward
returns over the subsequent decade.
490
:And as you would expect, the
higher the valuation that you pay
491
:for an investment, the lower it's
expected returns are over time.
492
:Which is exactly what you would expect.
493
:You can imagine that if I have an
investment where I think it's gonna
494
:make 5% a year but then instead of.
495
:Buying it when it implies 5%, I buy it
when it implies four, that my expected
496
:returns are gonna be somewhat less, right?
497
:So if you pay more for the
future earnings, then your return
498
:would necessarily be lower.
499
:The another way to think about this
is that if you take a look at the
500
:returns over the last century or
so, for as close a proxy to the
501
:s and p 500 is we can create, the
long term average annual return.
502
:Is in the mid-high single digits.
503
:Now, we've been getting much, much
better than that over the course
504
:of the last couple of years.
505
:But realistically, can we expect that rate
of constant price appreciation to persist
506
:from, one year to the next indefinitely?
507
:Some mean reversion is to be expected.
508
:The US economy grows probably
what, three and a half, 4% per year
509
:revenues in the s and p probably
grow at six, six and a half percent.
510
:And the compound annual growth rate
for adjusted EPS on the s and p has
511
:probably been close to 8% of late.
512
:At some point, it would be
realistic to assume that your
513
:annual returns would appreciate.
514
:Possibly with the, with, the
average rate of adjusted EPS growth.
515
:That would make sense.
516
:And if that's true, then 20% a
year is probably unrealistic.
517
:And if you are looking to get something
better than the rates of return,
518
:that a mean reversion would imply.
519
:It probably makes some sense to, to
spread your chips around a little
520
:bit and look for some investments
that pay some distributions as well.
521
:Ryan: Yeah.
522
:Yeah, that's a great point, Mike.
523
:Let's go back.
524
:I mentioned at the beginning, I'm a
little bit hesitant about some of these
525
:single stock option overlay strategies.
526
:talk about that for a second.
527
:What should financial advisors consider?
528
:Maybe they're like me, where they're
a little bit hesitant, incorporating
529
:them into their client portfolios.
530
:I often talk a lot about MA alignment,
making sure these products align
531
:with their client's objectives.
532
:What should financial advisors
consider when thinking about.
533
:Incorporating these single
stock option overlay strategies.
534
:Mike: So the single stock options
overlay strategies are basically intended
535
:to be a replacement for affecting an
options overlay on that stock yourself.
536
:So essentially I'm going to allow
people who trade millions of contracts
537
:every week to do my, covered call
spread strategy on Nvidia, for example.
538
:So if you don't wanna manage that strategy
yourself, and there's a lot to ma manage
539
:because you have to adjust the strikes
and roll those positions at least once
540
:a week if you're using weekly options.
541
:If it's a call spread, that's two options.
542
:And it's a whole lot easier of
course for a lot of people to say,
543
:you know what, I'm just gonna buy
Nvidia rather than buy Nvidia and
544
:manage that options process myself.
545
:So that's really who that's intended for.
546
:You already know that you want that
stock and you already know that you
547
:wanna run an option strategy on it.
548
:So that's really who the single
stock strategies are for.
549
:One of the things that I sometimes see
and have heard people say is they will
550
:just comb the universe and say, oh, this
one looks like it has a big distribution.
551
:I'm gonna buy that.
552
:Looking at a single stock options
income strategy product, and thinking
553
:of it kind of the way you might have
historically thought about a mutual
554
:fund, that's not what these are.
555
:These are strategies on stocks that you
can deploy, essentially democratizing
556
:a strategy that logistically would be
too difficult to affect for yourself.
557
:So if you have that stock and you
know you wanna run an options income
558
:overlay strategy against it, the ETF
might be a better solution for you
559
:in terms of much e, lower complexity.
560
:Perhaps there might even end up being
some tax efficiency in it for you.
561
:And it trades with the
convenience of a stock.
562
:So that's really who those are for.
563
:We also have diversified portfolios
though, so if you just want to do
564
:semiconductors, then you would do
something like a chippy or a soi.
565
:If you were looking for the,
large cap equities, then it
566
:would be something like biggie.
567
:And that's more of an
investment in the strategy.
568
:Pre diversified, whereas the single
stock strategies are basically, I like
569
:that stock and I wanna run an options
income overlay strategy against it, and
570
:I'm gonna let these guys do it for me.
571
:Ryan: Yeah, that's great.
572
:And a lot of, especially on the tech
side, these tech companies, a other
573
:employees might have a overweight in their
firm's employee stock option plan that
574
:I'm assuming these single stock option
strategies can help hedge against that.
575
:There's some other strategies.
576
:There that can diversify that portfolio,
maybe hedge against that single stock
577
:risk of having a portion of your
portfolio in your company's stock.
578
:Mike: Yeah, it's funny that you should
mention that I have spoken to people who
579
:have heavily concentrated core equity
positions that want to use options,
580
:overlays specifically for that reason.
581
:I've spoken to people who have worked
for and have retired from, and then
582
:that's an important point I would make
because if you're a current employee.
583
:And you're receiving RSUs
restricted stock units.
584
:You may or may not be permitted to, to
trade options overlays, but I have spoken
585
:to people who, for example, worked at
Nvidia retired several years ago, held
586
:on to some of their stock, never realized
what that stock was going to do and have
587
:generated seriously generational wealth.
588
:I've directly spoken to people who.
589
:Have made hundreds of millions of
dollars in that company just that one.
590
:And now are aggressively looking
at options overlay strategies.
591
:'cause they're interested
really in two things.
592
:One, they want to generate some income
and Nvidia doesn't pay a big dividend.
593
:So they, they can't just hold the
shares and wait for a quarterly
594
:dividend to support their lives.
595
:And in many cases.
596
:As their net worth swelled
because these stocks appreciated
597
:so too did their lifestyle.
598
:So people who once upon a time might've
lived on $300,000 a year now live on, I'm
599
:not kidding, $300,000 a month, let's say.
600
:And they can sell off shares of the stock
to do that, but oftentimes that's not
601
:what they want to do because it has a tax
consequence if they sell their shares.
602
:And secondly.
603
:This is a refrain I hear all the time.
604
:They say, every single time I thought
I, I should sell some stock and didn't.
605
:I'm so glad I did not.
606
:So they've actually gotten
to the point where they don't
607
:know what the stock's gonna do.
608
:They're afraid to sell it because
they don't want the tax consequence.
609
:And also, by the way, Invidia
being based in California, if
610
:you're a California resident, you
are a Cal California resident.
611
:I think.
612
:You might be on the, in, in Nevada side.
613
:I am in California.
614
:The tax laws are not particularly.
615
:Friendly if you are selling appreciated
stock because they don't have a
616
:concept of long-term capital gain.
617
:So it's not tax advice.
618
:I'm not a tax lawyer or an
accountant seek your own tax advice.
619
:But I will tell you that I do know
a lot of people who have appreciated
620
:stock holdings that are using options
overlay strategies to generate
621
:distributions off of their core
holdings without selling those holdings.
622
:And in some cases also to
hedge them a little bit.
623
:If you sell premium against an equity
portfolio, you're effectively reducing
624
:your basis through the course of time.
625
:Is that a complete hedge?
626
:No.
627
:Does it mute the downside of it?
628
:Yes.
629
:Ryan: Yeah, Mike, that's great.
630
:I love that example
too, because especially.
631
:with concentration risk, I'm sure a lot of
portfolios out there are, heavily weighted
632
:to whether it's the MEG seven or the
mega tech, or in your case, like we were
633
:talking about, just the individual stock.
634
:So great insight there.
635
:Lastly.
636
:Financial advisors go back to them.
637
:What do you tell them?
638
:And people like me, what do you tell
them when they think these strategies,
639
:particularly the single stock
option, they're just too complicated,
640
:too risky, implied volatility.
641
:Just another thing they
need to think about.
642
:They have nav erosion they heard
about, it's I don't wanna touch these.
643
:What do you tell those
financial advisors about these?
644
:That maybe there's some
misconceptions out there to get
645
:over 'em and that you know what?
646
:They are good strategies for a portfolio.
647
:Mike: Yeah, I guess I would
say a couple different things.
648
:First of all number one, if you're
looking at options, income strategies in
649
:general, and you're not a stock picker,
and look, some, a lot of investment
650
:advisors are also not stock pickers.
651
:They may be picking stocks or
they may have stocks selected by
652
:their clients who say, I want to
own this, I heard a great thing.
653
:I don't know whether they heard it at
the barber shop or they heard it from
654
:their best friend, or, they've been
reading the paper and they have an idea
655
:that they want to be in a certain stock.
656
:Sometimes individuals have their own ideas
and sometimes they're right to have those
657
:ideas, and if they have selected a stock.
658
:And they would like to run an options
income strategy, then the single stock
659
:strategies might be an appropriate case.
660
:If an advisor has a strong conviction in
a given underlying stock and is tracking
661
:options, prices and says, I like the
stock technically right here, it feels
662
:like it's probably gonna be range bound,
but the options premiums are high.
663
:I think we want to run an options overlay
strategy against the stock, but I'm
664
:not going to, I'm talking to clients.
665
:I am doing a lot of other things.
666
:I can buy a strategy like this and
I'm gonna allow people who do a lot
667
:of options trading to manage that
for me, I think that's a great case.
668
:I think also it's not a bad idea for
people though to have allocations to
669
:the more diversified products, the
ones that run a diversified strategy
670
:and have an options overlay strategy
against that to generate some income.
671
:The example I would provide.
672
:And I think this is illustrative is that,
as I previously pointed out something
673
:like our large cap 50, so I'm just, I'm
going to u use my Bloomberg terminal now.
674
:I'm just gonna compare what it did
versus the s and p, which, is essentially
675
:gonna behave a lot like it last year.
676
:So looking from December 31st,
:
677
:Okay.
678
:And if you look at that so
the s and p saw a 16.35%
679
:price appreciation from December from
the end of:
680
:24 to the last trading day of 2025.
681
:So if you brought spy, let's say that's
probably the biggest proxy, everybody
682
:knows that you'd have seen 16.35%
683
:price appreciation, and your total
returns would've been higher.
684
:You would've gotten 17.72%.
685
:What's the difference?
686
:Remember what I said.
687
:The s and p is giving you a
dividend yield of about 1%.
688
:Now, it was slightly higher
last year, a little over 1%.
689
:So the difference, 1.4
690
:ish percent was the dividends.
691
:So you bought stock, they went
up 16%, and then you got a
692
:little over 1% in dividends.
693
:And that's a great outcome, right?
694
:But for some people, that dividend
distribution wasn't sufficient.
695
:Biggie nearly tracked.
696
:Step for step how the s and p
behaved, because 80% of it is
697
:the exact same underlying stocks.
698
:So you're gonna have those stocks,
you're gonna get those dividends,
699
:but then additionally, you're
selling some options premium.
700
:So biggie's price appreciation
for:
701
:Now remember what I said for spy 16.3,
702
:16.4.
703
:Biggie appreciated 4.5%,
704
:but your total returns were over 19%.
705
:And that's because it's been paying
out distribution all of this time.
706
:And that distribution was more
than 14% of your initial investment
707
:throughout the course of the year.
708
:And I think that's really the point
that I would make for people is
709
:that you can choose a strategy that
will behave more like the underlying
710
:stocks or almost exactly like them.
711
:Quad D will behave a lot like the stocks
and get a little bit of options income,
712
:or you can get something that behaves
where your total returns are similar
713
:to stocks, but your price appreciation
isn't gonna be as much, but you're gonna
714
:get regular distributions like Biggie.
715
:Or you can just say, I love Nvidia.
716
:I wanna run in options
income strategy on that.
717
:So I'm gonna pick something like
NVD and that's gonna be mostly about
718
:getting distributions, but your nav
is, that's the trade off you're making.
719
:How much appreciation do you want?
720
:Versus how much distributions do you want?
721
:The more distributions you want,
the underlying asset's gonna
722
:have to really perform well.
723
:For to see considerable
price appreciation.
724
:And we did see that in, in
semis last year, but that's
725
:not gonna happen every year.
726
:There's, I've never seen a sector
that goes up 50, 60% year after year.
727
:Ryan: I wish there was Mike.
728
:I wish
729
:Mike: Oh yeah.
730
:Wouldn't that be great?
731
:Ryan: it would be fantastic.
732
:Mike, I knew it was gonna be a
really fun conversation and it was.
733
:Thank you for bringing
so much great insight.
734
:Really.
735
:It's been an honor on
a very important topic.
736
:Like you said, demographics, people are
aging, income is more important than
737
:ever now in such a great topic that,
another strategy that can help investors.
738
:During their retirement age.
739
:It was such a fun conversation.
740
:Thank you, Mike.
741
:Where can our audience get more
information about yield Max ETFs?
742
:Mike: The best place to go for
sure would be yield max etfs.com.
743
:We have all the information
about all the respective funds.
744
:All the tax information is there.
745
:You can actually go and see the
holdings of every single fund.
746
:They're updated every night.
747
:There you can see the transac.
748
:That took place, and that's a
really great place to get started.
749
:Ryan: Unlike what some people may
believe, I do some research here.
750
:Mike and I did check out yield Max.
751
:You guys do have a lot of great
insight and I love the transparency.
752
:So important.
753
:I love the transparency on the website.
754
:So thank you and thank you so much
for listening to this episode of
755
:Zephyr Adjusted for Risk podcast.
756
:You can watch all of our other episodes
on the Zephyr YouTube channel, all the
757
:other platforms that you may listen to
your favorite podcasts on, and please
758
:be sure to like and subscribe to those
channels and give us a follow on LinkedIn.
759
:Thank you very much and have
a great rest of your week.
