BY: HANS ALBRECHT, CIM®, FCSI, VICE PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS
Have you seen and appreciated the promotional brilliance of Toronto’s Russell Oliver, a.k.a. “The Cashman”? If not, he’s the uber-extroverted and seemingly omnipresent tv commercial personality who has been urging us to sell him our gold for decades. His catchphrase “Ohh YEAH” and infectious trademark jingle have wormed their way into millions of cerebellums (you know you can sing it!).
Sometimes I also think of myself as the cash man, but instead of turning long-lost baubles into cash, I take prevailing sentiment as reflected through option pricing and turn it into cash for portfolios. Covered calls and cash covered put selling can take advantage of investors’ general prevailing attitude toward anticipated price development in a given stock or index. Are investors fearful or confident? Whether they’re ultimately proven right or wrong doesn’t really matter since we’re able to monetize that sentiment right away through these harvesting strategies. Currently, implied volatility levels are lower, but does that necessarily mean underpriced? Thirty-day historical volatility, a measure of actual market movement, was very recently at multi-decade lows of around 5% and has only come back to around 10% after recent market volatility.
We must recognize that the cost of insurance should still relate in some way to the underlying risk movement: a 16% VIX is higher than it needs to be, based on market movement. The silver lining in a lower volatility environment is that it’s often accompanied by steepness in skew, on the call and put side. As the ‘Option Cashman’, that makes me happy as higher skew can make an increasingly positive contribution to performance in a low volatility backdrop. These are some of the many volatility metrics the Horizons Option Income Team uses to extract yield from option markets. I invite you to peruse our broad suite of Horizons covered call funds. Let us turn market sentiment into cash for you — Ohh Yeah!
The views/opinions expressed herein may not necessarily be the views of AlphaPro Management Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.