Future Wealth LLC, in association with our custodian TD Ameritrade/Schwab, introduces Options trading to clients in their portfolios. Options trading adds to the current suite of services offered by Future Wealth LLC which includes managing investments in Brokerage, IRA, Roth IRA, UTMA, 529, Insurance, Annuities, HSA and Trust accounts. Future Wealth LLC also provides advisory services on 401K plan choices to all our clients.

Options offer several opportunities – to hedge against a stock/ETF portfolio at a low cost, enable additional income and provide additional protection in volatile times.  Depending on the risk tolerance of a client, Options provide another source of income and protection to client portfolios. Through a diligent process of selection, Options can also diversify and reduce the risk in one’s portfolio.

While the Options market can be complex and is usually the domain of sophisticated investors, there are few scenarios where Options trading can provide growth, income and protection to all investors. Here are few Level 1 and Level 2 Option examples:

  1. Call Option – Instead of buying 100 shares of a stock or ETF that trades at $10 per share that you expect will go up in value to $15 and spending $1000 ($10×100), you can buy a Call Option on the same $10 share or ETF for ~$200*. If the stock goes up in value to $15, you get the right to buy the stock at $10. Alternatively, you can sell the Option that would have gone up in value with the increase in stock price from $10 to $15. If the stock goes down or does not get to $15, your Option expires worthless and you lose the $200. This is an example of a growth strategy that comes from buying an Option at a lower cost rather than buying shares of a stock or ETF.

  2. Covered Call Option – If you already own a stock/ETF, you can generate income by selling a Covered Call Option which means you are giving the right to someone else to buy the stock at a higher price and you get income for giving that right. Assume you bought 100 shares of company X that trades at $10, you can sell a Covered Call Option which will provide you income of ~$200* in return for agreeing to sell the stock at $15. If the stock does not get to $15 by a certain date, the Option expires and you keep the $200. If it gets to $15 or above, you have to sell the stock to the Option buyer and you pocket $500 ($5×100) plus $200. This is an example of income producing strategy.

  3. Put Option – If you expect the market to enter a correction or a stock to lose value, you can buy Options instead of selling your holdings. For example, if you expect the Nasdaq to sell off or you want downside protection for your current Nasdaq holdings, you can buy a Put Option on the Nasdaq Index (QQQ) expecting a 10 percent decline for ~$200*. If it falls in value by 10%, you have the right to buy QQQ at the lower price or sell the Option that would have appreciated when the QQQ fell by 10%. If QQQ does not drop by 10%, you lose the $200 value of the Option and continue to keep your holdings. This is a risk protection strategy.

Of course, all of these Options have their own set of downside risks and it is important to understand them before venturing into the Options market. Your Future Wealth LLC advisor will be able explain in detail how options work and what are the downside risks. There are several other flavors of Options – Collars, Spreads and Straddles, which we are more complex and make up Level 3 and Level 4 Options. We are not offering Level 3 and Level 4 Options at the present time but may do so in the future.

An added benefit to our clients is that our fee structure remains unchanged – Future Wealth LLC will not charge any additional fees for placing Option trades in our clients accounts. Link to our fee structure, unchanged since the inception of the firm in 2016, can be found here – https://futurewealthllc.com/actively-managed-portfolios/ However, unlike stock/ETF trading which are free of commissions to buy and sell, Options trading involves modest commission fee of $0.65 charged by TD Ameritrade/Schwab for every Option contract executed. Future Wealth LLC does not receive any portion of the trading commission. We continue to remain a fee-only business and strive to be the lowest cost financial advisor.

If you are interested in exploring the Options market and would like to discuss if it is suitable for your portfolio, please contact us at jay@futurewealthllc.com or call us 408.839.4430.

 

Cost of the option could vary depending on stock/ETF and the expiration date of the Option.

%d bloggers like this: