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Writing covered calls to reduce concentration

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Most investors, if they think about options at all, consider covered call writing as an alternative income strategy. Collecting a premium for giving someone else the right to buy your stock at a set price over a given time span can be a source of cash. But it also can enable advisors to reduce risk in a concentrated portfolio while preventing the client from getting clobbered by taxes when selling.

“We’re trying to manage the tax bill. It’s not really just about the income,” says Gigi Turbow Marx, founder of Old Field Advisors in Mellville, N.Y. “The income is the carrot to get them to let go of the stock.”

Marx says that some concentrated portfolio clients are older women whose parents gave them stock when they were teens. “They’re not focused on investments and they just kind of let it sit,” she says.


Aaron White, a wealth advisor at the San Francisco office of Vista Wealth Management, also uses covered call options for concentrated portfolios. But his clients have not been sitting on long-ago investments. White works with Silicon Valley employees. “Much of their compensation is in the form of equity,” he says.

That can lead to restrictions that scheduled selling can overcome. “For clients who are currently at a company and are subject to blackouts and trading restrictions, we’ll typically have to do their trading through whoever is administering the stock plan,” says White. But for clients who have large positions in the stock of a former employer, Vista would handle the covered calls and the sell plan could take 12 to 24 months.

White says covered calls would be written at a strike price above the current market price and rolled forward every six to eight weeks. If the stock is moving up, strike prices are adjusted higher. For some clients, this has not only reduced their concentration, but also improved their returns.


Sometimes an options strategy ends more quickly. “Options are quirky. You can get very early exercises,” cautions Marx. And taxes can further complicate the picture. Marx notes that it is possible to spend no cash rolling options forward to avoid selling the underlying stock below the current market price. But because of timing differences, the options can create a tax loss that shields gains on the stock.

This is an area that Marx knows well. She even wrote a chapter on options in the book Investing in an Uncertain Economy for Dummies. But if you are not up to speed, Marx cautions, “You need to outsource this to a sub-advisor who understands the quirks.”

Joseph Lisanti, a Financial Planning contributing writer in New York, is a former editor-in-chief of Standard & Poor’s weekly investment advisory newsletter, The Outlook.

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