The Academy of Financial Services 35th Annual Meeting

options strategies, buffers, floors

Recent market volatility and low bond yields have left many investors considering new ways to capture market upside while limiting loses. One potential approach would be to use options (e.g., calls and puts), either through a direct purchase or some type of prepackaged product, an approach we generalize through the term “Protected Wealth Strategy” (PWS). PWS’s effectively reshape the potential return distribution of an underlying financial instrument, such as the S&P 500, which some investors may find attractive. Using a utility-based resampled optimization framework we find that PWS’s have the potential to improve portfolio efficiency--potentially significantly--depending on the strategy attributes and investor circumstances. This is especially true of strategies that involve selling out-of-the-money put options (i.e., buffer approaches). Before implementing any type of PWS, though, an investor needs to understand the unique risks and costs associated with respective strategy, especially when considering a prepackaged product.