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Capture Gains with ETFs and Covered Calls
05/18/2012 7:00 am EST
Advisor Jesse Anderson explains his firm’s strategy for identifying ETFs with efficient options markets, thereby capitalizing on inherent volatility. He discusses one of the firm’s core ETF positions, and a sector ETF he likes right now.
Kate Stalter: Today, I’m on the phone with Jesse Anderson. He’s the chief investment officer at Snider Advisors.
Jesse, I had heard some interesting, intriguing things about the Snider method, and I wanted to get in touch with you and hear a little bit more about that. Can you begin today by just setting the stage for us, and telling us what the Snider method is and what the history of that is?
Jesse Anderson: Sure, thanks Kate. The Snider method is a long-term investment strategy, and we use both stocks and a big piece of it is covered calls as well, kind of using cash management in order to generate income. And that’s probably one of the things that sets the Snider method apart from a lot of other, let’s say, stock market strategies, is our focus on cash flow and income generation.
We started out looking at ways to use your portfolio to replace income, specifically when you look at retirees, because we’re all aware of the wave of baby boomers that are about to retire. And in the past they had pensions to go out and support their lifestyle once they retired, but these days that’s kind of nonexistent. So they’re having to rely on their 401(k)s, and that’s where we have generated an investment strategy to really focus on that, and turn their 401(k)s and their portfolios into a monthly paycheck.
- Also read: https://www.moneyshow.com/video/VideoNetwork/100/8073/Earn-Safe-Steady-Income-from-Options/
Kate Stalter: And you use separately managed accounts?
Jesse Anderson: Yeah, when we manage accounts, we actually look at each account and allocate it specific to that account’s perimeters, based off the size. So each account is individually handled. We won’t look at two accounts and they’ll be exactly alike.
That’s really due to the kind of options that are involved in our strategy when we go out and trade an account for the first time. And then ongoing, we look at the market, and what’s out there, and the volatility and the stocks or the positions that we’re going to use. And that constantly changes throughout the day, and ongoing.
So really, you could look at all the accounts we manage, and it’s very unlikely that any two are exactly alike.
Kate Stalter: So is there regular trading in these accounts, or is it a longer-term hold strategy, or maybe some kind of mix of both?
Jesse Anderson: I’d say it’s a good mix of both. Any time we take a position we’re really expecting to, or are confident in, taking kind of a long-term position in it.
But what does happen is—and we do, let’s say, trade or rebalance these accounts on a monthly basis—because the use of our covered calls, we always use the front month. So they expire only 30 days out, and we really look to take advantage of the time decay; that is the highest in that time period.
So each month we go in, and we look at the positions out there. And we either kind of continue with the positions that we currently own, or go out and buy into some new or additional positions.
But it really is kind of a monthly trading process, but there are times where we’ll hold a position over many years; other ones might just last, you know, one month. It really depends on how the position goes, but we’re always, we look at it as it’s a long term commitment.
Kate Stalter: When you’re talking about rebalancing on some kind of monthly basis, that does sound like there is a technical or chart component to that. Would that be the case?
Jesse Anderson: No, I wouldn’t say there’s any technical—another factor that we really use is dollar-cost averaging. So we won’t go out and commit all of our money into a position right away. We can look, see how the position works over the course of the month or long term and if we can add money to the position over the course of multiple months.
A big part of our accounts are in cash, and that’s cash that is allocated to the positions open in the account. And we’ll put it to work if necessary. But if we’re able to generate that income with less equity involved, we’ll do that. But we’ll add to the position.
Definitely no technical factors—more dollar-cost averaging in new positions.
Kate Stalter: Let’s shift gears. We had been communicating by e-mail about some of your ETF strategy as that applies to your methodology. Tell us about that, Jesse.
Jesse Anderson: Yeah, it’s something we just introduced. We’re all very pleased with the strategy.
What we found is: People had a little bit of higher concern holding individual stocks. And with the evolution and the introduction of ETFs, what we are able to do these days is basically work our same kind of Snider Investment Method strategy on ETFs.
One of the big things we do is: Have one position, typically kind of a broader market index. One of the ones we’re using these days is the Russell 2000 Index ETF (IWM), but we go out and use that as kind of a larger position. We place those same kind of covered calls on that position, and then beyond that we have some smaller ETFs, but they’re a little more volatile.
And you know, in our case, in covered call terminology, when you have volatile, that means more income for us. And so we go in and again, use the same strategy to some of these smaller positions. But typically, we hold one big position in more of a broad market index. They will generate a piece of our income, and kind of manage the bulk of our exposure to the market.
Kate Stalter: I want to follow up on that. It’s interesting that you’re using the Russell 2000 ETF as a core. Because what I hear a lot is, advisors being conservative, staying in maybe ETFs that are indexed to some of the larger caps. Talk a little bit about that—why you’re using the IWM. That’s intriguing.
Jesse Anderson: Ultimately it comes down to that ability to generate income, and we do need some volatility in there. Right now, I’d say that we’re able to get that in the IWM position.
I don’t think we’re ultimately tied to that for the long run. I think we see different indexes have different amounts of volatility, even over course of the last couple of years, when we look at it.
But for us, it’s really just kind of gaining exposure to the broad market. And with that index, we quickly have access or exposure to nearly 2,000 companies. That’s plenty of diversification, and we’re happy with that level of exposure.
Kate Stalter: How about any sector ETFs? Is that an area that you’re using?
Jesse Anderson: Outside of the broad market, we do use what we call satellite positions. They tend to represent asset classes or different regions.
These days, one of our satellite positions is the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). And again, it comes in there, and not something you’d want to have a significant portion of your portfolio exposed to, but you definitely have a portion of it exposed to that.
And for us, we can allocate it, a piece of our portfolio, and then earn pretty good option premiums off of that because of the volatility that’s involved. But again, ultimately, for the long run we’re willing to kind of hold that position, and be in it for a long period of time.
Kate Stalter: How do you determine which sectors or regions or market caps that would be some of the satellite positions?
Jesse Anderson: The biggest thing is that volatility, and the amount that these ETFs are paying. And when we look at paying, we look at the covered call premium we’re able to earn.
We also look at the one strike out of the money when we’re looking to buy into a position. It’s about where that premium is, because with our focus on income, our focus on generating that income cash flow month after month, volatility and the amount that that is paying is pretty critical for us.
So we’ll, we have our list of ETFs—there’s thousands of them out there these days, but we can kind of narrow it down and make sure that we’ve got ones with good, liquid option markets. That’s something that has just evolved, that allowed us to introduce this portfolio.
But once we have our list of ETFs, ones with good efficient option markets, then it’s just about looking at it and saying, “OK, where can we earn some premium?” And going in and allocating from that point.
Kate Stalter: To kind of sum this up: It’s not about just going into an ETF. Really, the option market for a given ETF—that sounds like that’s central to your decision to take a position.
Jesse Anderson: It’s definitely essential. We have a bunch of different ETF providers out there, but for us it really comes down to which ETFs have options on them. Because you know that’s a critical, crucial part to our strategy.
Then, which ones are liquid. You could consider the same ETF by one of the bigger three providers, and only one will have a good option market. So that’s a pretty critical piece for us to go in and allocate to these positions.
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