Option-Strategy Indexes: A Powerful Tool for Improving Portfolios

Abstract

The majority of multiasset investment portfolios allocate most of their assets to a mix of stocks and bonds, ostensibly relying on the observed negative correlation between the two asset classes for diversification. Unfortunately, the observed negative correlation between equities and fixed income is not guaranteed to continue. Furthermore, although rates are beginning to rise from historic lows, bonds may take some time to provide satisfactory yields. Equity options may be used to reduce the risk of portfolios, generate income, or both. Historically, options strategies have been out of reach for most investors, but a growing number of exchange-traded funds offer access to option strategy indexes that can provide the potential for material improvements in the risk and reward of portfolios. In this article, the authors introduce a set of option strategy indexes linked to the NASDAQ-100 Index that can be accessed via exchange-traded funds and demonstrate how they can add value to multiasset portfolios.