Generate Income and Protect Underlying Stock
Single stock risk is often discussed at ZEGA. We understand why clients hold single stocks due to avoiding significant tax consequences, maintaining a low cost basis for the stock itself, or it could even be an emotional reason. Regardless of the situation, there’s a good chance ZEGA can help limit the inherent risk a large single stock position carries.
ZEGA’s concentrated position hedging program reviews each individual position’s optionality and cost of hedging to determine the most beneficial way to build floors in clients’ wealth. We utilize individual stock options and/or index options to create protective hedges for your clients. ZEGA also scans the volatility surface to look for opportunities to reduce the cost of hedging by selling premium around their holdings. ZEGA may also use their overlay strategies to create additional income.
ZEGA’s approach:
- Construct hedges using options on underlying stock
- Reinvest hedging profits into other investments to increase diversification across entire investable portfolio
- Laddered positions where possible with at least 2 expiration dates to spread out protection
- Maintain dividend income from stock holding
- Overlay tactics that utilize the concentrated stock as collateral for additional income
The ZEGA portfolio hedging program is recommended as a protective component to complement core equity holdings. Clients should have moderate risk tolerance for exposure to this strategy.
HiPOS Overlay Provides Potential for Additional Income
ZEGA can also sell option premium using ZEGA’s HiPOS Conservative strategy on a portion of the portfolio’s liquidation value as appropriate. The buying power released by the concentrated position permits us to sell premium without incurring debit balance or margin interest payments. This potential additional income can help pay for the hedges.
Concentrated Stock Portfolio Hedge
Note: Returns are expressed in US Dollars net of fees.
ZEGA Financial is a registered investment adviser and investment manager that specializes in derivatives. ZEGA is a separate accounts manager and all returns expressed herein are solely from the separate accounts business within ZEGA.
To qualify as a Concentrated Stock Portfolio Hedge strategy, the account must be invested with its assets in at least 70% in a portfolio of Equities. The value is based on the notional dollars controlled. The portfolio must also have a hedge built in that limits the downside for the majority of the notional equity controlled. All portfolios that are at least 70% allocated to this strategy are included.
ZEGA Financial claims compliance with the Global Investment Performance Standards (GIPS). To receive a full list of composite descriptions of ZEGA Financial and/or a presentation that complies with the GIPS standards, contact Jay Pestrichelli at 1-800-380-9342, ext 101 or jay.pestrichelli@zegafinancial.com.
Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio.
These results should not be viewed as indicative of the advisor’s skill. The prior performance figures indicated herein represent portfolio performance for only a short time period, and may not be indicative of the returns or volatility each portfolio will generate over a long time period. The performance presented should also be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the performance information. The actual results for the comparable periods would also have varied from the presented results based upon the timing of contributions and withdrawals from individual client accounts. The performance figures contained herein should be viewed in the context of the various risk/return profiles and asset allocation methodologies utilized by the asset allocation strategists in developing their model portfolios, and should be accompanied or preceded by the model.
Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment’s volatility. Employee accounts do not pay advisory fees, so the returns illustrated for the strategy are higher than they would be if employee accounts paid similar fees.
The investment management fee schedule for the composite varies. Our wealth management fee for portfolio management services is 1.5%. These fees are negotiable depending upon the client’s financial situation and the client’s objectives. Our sub advisory fee for portfolio management services is 0.75%. These fees are negotiable depending upon the complexity and scope of the plan.
Certain portfolios may incur additional advisor directed fees. As a result, ZEGA’s returns for these accounts are net of the additional fees due to our subadvisor agreements.