Option Overlay Strategies2022-04-12T14:48:09-06:00

Option Strategies

Strategies for clients’ seeking to manage risk and generate cash flow with options. Potential to profit from trading underlying securities through puts and covered calls.

Shelton Equity Income Strategy

The Shelton Equity Income Strategy serves as a “core equity” strategy within your overall asset allocation program. Our flexibility for your clients’ preferences will help you deliver the personalization your client is seeking.

We seek to increase cash flow and reduce overall volatility by building a portfolio of carefully selected US stocks and writing calls on the stocks held in the portfolio. This process is generally referred to as “selling covered calls.”

Strategy Information

In The News

Article: FA-mag.com: Putting on the Calls

 Article: WealthManagement.com: The Flight of the Condor

By clicking the above links, you’ll leave this site and go to a third-party website. Shelton Capital Management does not control the content or privacy practices of the other website and does not endorse or accept responsibility for the content, policies, activities, products or services offered on the site. It should not be considered investment advice. The information provided does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security.

Process

Our team selects a diversified portfolio of large cap blue-chip equities, all of which are selected based on in-depth fundamental analysis. Portfolio sector weightings are designed to be similar to those of the S&P 500, to avoid sector concentrations. On these carefully selected US stocks, we seek to fully write the portfolio to reduce overall volatility while adding incremental cash flow. The number of stocks may range between 30 and 50 depending on the size of the portfolio.

Distilling the Equity Universe
equity funnel 500 chev We start with the S&P 500, a universe of widely held large-cap US stocks in the industrial, transportation, utility, and financial sectors which are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor’s.
equity funnel 100 chev Applying fundamental analysis, stocks are ranked using third-party research, which include factors such as the 10-year trend of relative earnings and prices, recent earnings, price changes and earnings surprises.
equity funnel 40 60 Chev Using an additional fundamental screen, stocks are filtered by a variety of criteria, including free cash flow yield and price to sales ratios. The highest ranking equities are then selected in each of 11 sectors to closely replicate the sector weightings of the S&P 500 Index. The Portfolio Manager has a preference for large-cap stocks with attractive dividend yields.
equity funnel 30 chev Finally, we identify and purchase roughly 30 equities which we believe have the most over-priced call options. We strategically write (sell) those covered calls two to six times per year to generate cash flow in addition to the portfolio’s dividend yield.

Benefits

  • 5-7% cash flow, not including the portfolio’s dividend yield
  • Diversified portfolio allocation seeking to generate cash flow
  • Reduce portfolio volatility while also retaining potential for limited capital appreciation
  • Comprehensive reporting
  • Access to the Portfolio Management team

Considerations

  • A covered call strategy limits upside potential for stock appreciation and is likely to therefore underperform in strong markets.
  • A covered call does not protect a stock from downside risk. The loss for the investor on each position could be the current price of a stock less the premium received for the call option.
  • Withdrawals (such as systematic withdrawals as part of an income strategy) may result in a declining portfolio value over time.
  • All investments involve risk including the possible loss of principal. There can be no assurance the strategy will achieve its investment objective.
  • If securities are called away, substantial capital gain tax could be incurred.
  • The sale of stock will produce tax consequences for U.S. taxpayers. Each option transaction also produces a tax consequence. You should discuss with your personal tax advisor how the options transactions and any sales of underlying stock will affect your tax situation. Shelton Capital Management does not provide tax advice.

Management Team

FAQs

Can clients avoid purchases of individual stocks they don’t want to own in Shelton Equity Income Strategy?2019-06-27T16:48:43-06:00

Yes. Some investors don’t want to add further concentration of stocks they may already own elsewhere in their portfolios. Others prefer to avoid stocks that don’t fit socially conscious or other criteria. We honor these requests.

What are the main risk factors in option overlay strategies?2019-08-28T13:20:07-06:00

Compared to owning the underlying securities outright (without overlay), Covered Call Writing may limit upside potential for securities appreciation. If securities are called away, substantial capital gain tax could be incurred. Option overlay strategies do not protect a security from downside risk. Investors could lose up to the full current price of underlying securities, less option premiums received.

What happens if one or more of the positions are “called away”?2019-08-30T10:22:20-06:00

The proceeds are reinvested into a replacement security as determined by the Portfolio Manager.

Can clients transfer stocks they already own into Shelton Equity Income Strategy?2019-06-27T16:30:11-06:00

Yes, if Shelton Capital believes these stocks fit the objectives of the strategy and provide option-writing opportunities, existing positions can be transferred to a strategy.

Important Information

Options involve risk and are not suitable for everyone. Prior to buying or selling an option, your client must receive a copy of characteristics and risks of standardized options. Copies of this document may be obtained from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500, Chicago, IL 60606 (1-800-678-4667).

Any strategies discussed, including examples using actual securities’ price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement or recommendation to buy or sell securities. You should review transaction costs, margin requirements and tax considerations with a tax advisor before entering into any option strategies. There are management fees and other charges associated with the Shelton Separately Managed Account programs.

Shelton Covered ETF Portfolio Strategy

The Shelton Covered ETF Portfolios are designed for investors who are looking for a portfolio solution with a fully diversified portfolio representation using a comprehensive mix of ETFs.

Shelton Covered ETF

Download Fact Sheet

Process

Allocation Evaluation Opportunities Risk & Return
Shelton Capital allocates based on efficient frontier analysis and offers three asset allocation models to choose from based on a client’s time frame, risk tolerance and cash flow criteria. Each model has full asset class representation offered by today’s ETF providers such as iShares, State Street, and Vanguard. The models are carefully constructed and monitored to stay current in today’s market. We then evaluate and select the best ETF for each asset class in the portfolio. The selection is based on key attributes such as liquidity, expense ratio, and availability of an options market. We will continue to evaluate each holding to ensure we have the best representation for that asset class. Combining years of options trading expertise with the latest options valuation technology, we identify the most favorable call writing opportunities and sell the calls on most, if not all, ETF positions. A cash flow stream is generated through the call option premiums collected plus any dividends the underlying ETF may be paying. We continue to monitor risk and return characteristics for the open positions. As options expire, new options are evaluated and sold as we seek additional premiums to meet the cash flow target.

Portfolio Options

Conservative: This Strategy provides a portfolio that seeks to have lower volatility in relation to the overall market (as measured by the S&P 500) for investors that seek moderate growth. We seek to manage the Strategy so that over long periods of time, the strategy should have less volatility than the overall equity market. With lower anticipated volatility, this approach carries relatively lower risk and seeks to provide a moderate level current cash flow yield.  This Strategy is appropriate for investors with a long-term time horizon.

Balanced: This Strategy provides a portfolio that seeks to have a higher level of volatility than our Conservative Strategy for investors who are more comfortable with risk, seek capital growth and a higher current cash-flow yield in relation to our Conservative Strategy.  We seek to manage the Strategy so that over long periods of time, the Strategy should have lower volatility in relation to the overall market (as measured by the S&P 500).  With its anticipated higher volatility relative to the Conservative Strategy, this approach carries relatively higher risk and is expected to provide a higher level current cash flow yield. This Strategy is appropriate for investors with a long-term time horizon.

Growth: This Strategy provides a portfolio that seeks to have a higher level of volatility than our Balanced Strategy for investors who are comfortable with risk, seek capital growth and a higher current cash-flow yield in relation to our Balanced Strategy.  We seek to manage the strategy so that over long periods of time, the strategy should have lower volatility in relation to the overall market (as measured by the S&P 500).  With its anticipated higher volatility relative to the Balanced Strategy, this approach carries relatively higher risk and is expected to provide the highest level of current cash flow yield of any of Covered ETF portfolios. This Strategy is appropriate for investors with a long-term time horizon.

Benefits

  • Provide Investors an ETF strategy that combines aspects of both passive and active management.
  • Seeks to achieve market returns similar to the Dow Jones Moderately Conservative Portfolio Index by investing in a portfolio of exchange traded funds (ETFs) while utilizing a covered call writing strategy to generate cash flow.
  • Available in three different risk/return parameters agreed upon to by the client (Conservative, Balanced and Growth).

Considerations and Risks

  • A covered call strategy limits upside potential for security appreciation and is likely to, therefore, underperform in strong markets.
  • A covered call does not protect a security from downside risk. The loss for the investor on each position could be the current price of a security less the premium received for the call option.
  • Withdrawals (such as systematic withdrawals as part of an income strategy) may result in a declining portfolio value over time.
  • All investments involve risk including the possible loss of principal. There can be no assurance the strategy will achieve its investment objective.
  • The sale of stock will produce tax consequences for U.S. taxpayers. Each option transaction also produces a tax consequence. You should discuss with your personal tax advisor how the options transactions and any sales of underlying stock will affect your tax situation. Shelton Capital Management does not provide tax advice.

Management Team

FAQs

What happens if one or more of the positions are “called away”?2019-08-30T10:23:44-06:00

The proceeds are reinvested into a replacement security as determined by the Portfolio Manager.

What are the main risk factors in option overlay strategies?2019-08-30T10:24:32-06:00

Compared to owning the underlying securities outright (without overlay), Covered Call Writing may limit upside potential for securities appreciation. If securities are called away, substantial capital gain tax could be incurred. Option Overlay Strategies do not protect a security from downside risk. Investors could lose up to the full current price of underlying securities, less option premiums received.

Which portfolio is right for me?2019-06-27T16:58:12-06:00

The process of matching your investment goals and personal profile with an asset allocation mix is based primarily on risk tolerance, time horizon, and other factors. While some clients establish their investment objectives and guidelines on their own, consulting with an advisor may be beneficial to identify the most suitable model portfolio for best results.

Important Information

Options involve risk and are not suitable for everyone. Prior to buying or selling an option, your client must receive a copy of characteristics and risks of standardized options. Copies of this document may be obtained from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500, Chicago, IL 60606 (1-800-678-4667).

Any strategies discussed, including examples using actual securities’ price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement or recommendation to buy or sell securities. You should review transaction costs, margin requirements and tax considerations with a tax advisor before entering into any options strategy. There are management fees and other charges associated with the Shelton Separately Managed Account programs.

Shelton Option Overlay Strategy

The Shelton Option Overlay Strategy is designed to implement an Option Overlay on a large concentrated single-stock position that a client is comfortable selling at a specific target price. With a customizable risk/return trade off, we seek to make existing assets more productive. We monitor existing and potential option positions for the most advantageous option given the clients risk/return objectives and the current asset’s characteristics. The strategy’s goal is to enhance returns above the stand alone performance of the stock by 2-6% annually depending on the underlying stock.

Strategy Information

Shelton Option Overlay

Download Fact Sheet

Process

Investors holding one or more concentrated stock positions should consider the Shelton Option Overlay Strategy if they are looking to:

  • Generate cash flow
  • Reduce risk
  • Maximize liquidation value

Advisors can also use Shelton Option Overlay Strategy to seek potential current cash flow from a concentrated stock position while enabling a gradual, planned reduction in stock concentration over time, helping the assets move into a more diversified managed portfolio.

No investment strategy is without risk. Upside potential is limited, the estimated cash flow target may not be met, and a change in the Target Price may require additional shares or cash.

The Option Overlay makes such assets visible to the advisor and gives the advisor a continuing role in monitoring their place in the client’s overall net worth.

Benefits

  • With a customizable risk/ return trade-off, the client has the potential to enhance cash flow by as much as 2-6% depending on the particular stock making the holding more productive.
  • Shelton Capital applies our expertise and options valuation technology to identify the most favorable call writing opportunities based on client objectives.

Considerations

  • The Shelton Option Overlay Strategy involves selling potential upside return on a stock for current cash flow in the form of option premium. While the strategy has the potential to improve cash flow produced on a stock position, the primary strategy of selling covered calls limits the potential upside performance of the shares that have been covered by the options sold.
  • This strategy does not protect a stock from downside risk. The loss for the investor on each cash position could be the current price of a stock less the premium received for the call option.
  • If securities are called away, substantial capital gain tax could be incurred.
  • The sale of stock will produce tax consequences for U.S. taxpayers. Each option transaction also produces a tax consequence. You should discuss with your personal tax advisor how the options transactions and any sales of underlying stock will affect your tax situation. Shelton Capital Management does not provide tax advice.
  • The Target Price is an estimate of the upside potential using our Shelton Option Overlay Strategy. There is no guarantee that this value can be realized.
  • All investments involve risk including the possible loss of principal. There can be no assurance the strategy will achieve its investment objective.

Management Team

FAQs

What if the client wants to exit the strategy?2019-06-27T15:47:45-06:00

The ability to exit the strategy is always available but may have a negative financial consequence. If the client chooses to exit the strategy, we would have to repurchase the outstanding calls and this cost will vary, depending upon a multiple of factors.

What happens if an early assignment occurs?2019-08-28T15:56:44-06:00

There have been occurrences of early assignment. At the time of an early assignment, you are required to surrender shares of the stock. It is the responsibility of the client to report the appropriate tax lot of the sale to the IRS.

Are the projected annual cash flows or the target price guaranteed?2019-08-16T16:22:35-06:00

No. They are projections, which depend upon many assumptions, including stock price, implied volatility and interest rates.

Important Information

Options involve risk and are not suitable for everyone. Prior to buying or selling an option, your client must receive a copy of characteristics and risks of standardized options. Copies of this document may be obtained from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500, Chicago, IL 60606 (1-800-678-4667).

Any strategies discussed, including examples using actual securities’ price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement or recommendation to buy or sell securities. You should review transaction costs, margin requirements and tax considerations with a tax advisor before entering into any options strategy. There are management fees and other charges associated with the Shelton Separately Managed Account programs.

Shelton Equity Income Fund

The Fund’s objective is to achieve a high level of income and capital appreciation (when consistent with high income) by investing primarily in income producing U.S. equity securities.

Morningstar RatingTM

starstarstarstarstar   EQTIX

Shelton Equity Income Fund (EQTIX) received an Overall Morningstar RatingTM of 5 stars among 65 Derivative Income funds, based on risk-adjusted returns, as of 3/31/2022. Important Information for Morningstar® Rating

Fund Information

Screen Shot 2019 11 29 at 6.10.27 PM 1

 Download: Fact Sheet

Ticker: EQTIX

Benchmarks:
CBOE Buywrite Index
S&P Citigroup Value Index

Resources

Documents PDF Zip
Prospectus pdf DL
Annual Report pdf DL
Statement of Additional Information pdf DL
Semi-Annual Report pdf DL

Important Information

Fund information is not intended to represent future portfolio composition. Portfolio holdings are subject to change and should not be considered a recommendation to buy individual securities. The Fund is subject to several risks, any of which could cause the Fund to lose money. These risks, which are described more fully in the prospectus, include stock market risk, economic and political events risks, sector risks, large and medium sized company risks and value investing risks.

Investors should consider a fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about the fund. To obtain a prospectus, visit www.sheltoncap.com or call (800) 955-9988. A prospectus should be read carefully before investing.

Shelton Funds are distributed by RFS Partners, a member of FINRA and affiliate of Shelton Capital Management.

Effective on May 19, 2021, the fund changed its name from Shelton Core Value Fund to Shelton Equity Income Fund.

INVESTMENTS ARE NOT FDIC INSURED OR BANK GUARANTEED AND MAY LOSE VALUE.

Covered Call Writing Basics

Understand the basics behind enhancing portfolio returns under certain market conditions.

Overview

Generally, investors that own a widely held, publicly-traded security can choose to write a covered call against the position as long as an options market exists for that stock.

A call is a listed option that gives the buyer the right (without obligation) to buy the underlying shares at a stated “strike price” on or before the option’s maturity date.

The seller (“writer”) of a call receives a cash premium when the option is sold and has the obligation to sell shares at the strike price, at any time on or before maturity. Each premium generates cash flow for the seller.

When the seller owns the underlying security against which the option is written, the sale is a covered call write, which is considered a hedged transaction because the seller is “long” the security and “short” the option. If the security’s price exceeds the strike price and is called away, the covered writer can deliver the long position at little or no loss or out-of-pocket cost. However, the writer sacrifices any price gains above the strike price.

Our sophisticated professionals have the specialized knowledge and experience to:

  • Know when options are attractively priced, relative to their value
  • Choose the best strike prices for pursuing a personal investment objective
  • Trade or “roll” options before maturity, to maximize their “time decay” value
  • Manage to avoid portfolio disruption and adverse tax consequences

A disciplined Covered Call Writing Strategy is designed in consultation with the client’s advisor who clearly understands the client’s objectives allowing for a customized solution. The Strategy is then professionally implemented, day-to-day, by Shelton Capital Management, focusing on analyzing the options market and executing options trades on a timely, cost-efficient basis.

Example

An investor owns 500 shares of Exxon Mobil common stock (XOM) when it is trading at $71 per share. The investor sells five call options on XOM at a premium of $3 per share and a strike price of $75. The investor will receive $1,500 in cash (500 shares X $3 premium) when the transaction is made and participate in any price gains up to $75.

But if the stock goes higher before the option’s maturity date, appreciation above $75 is lost. The investor must either: 1) give up the stock at $75 or: 2) pay the difference between the $75 strike price and the market price per share at maturity.

Contact Us For More Information

We have a team of professionals dedicated to supporting the needs of our advisor clients. Request to consult with a Portfolio Manager and your Director of Advisor Services to learn more about how we can help you meet your clients’ needs.

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