We don’t need to rehash all the Fed’s recent policy mistakes, but people were rightfully concerned this cycle of rapid rate hikes would ultimately lead to “something breaking.”
Thus, here we are; the failure of Silicon Valley Bank (SIVB), Silvergate Capital (SI), and the possible contagion that could lead to another banking crisis. This forced the federal government to step in and provide Silicon Valley Bank depositors a backstop, making them all whole once more.
While there is no direct impact on most businesses, it does create uncertainty over second order effects. Effects like the slowing economy and the stickiness of inflation, which have put pressure on the broader market and lead to large spikes in volatility.
It makes no sense to panic, in fact, there are probably good buying opportunities in the market now, perhaps even in the financial sector. However, there are steps one can take that not only reduce portfolio risk but also benefit from the fear.
This all springs to mind looking for ETFs that employ option selling strategies, such as covered calls or selling puts, that can help smooth out returns during tumultuous times.
A Covered Call, also known as a Buy-Write, refers to the process of selling a call option on a stock or fund that you already own.
By owning the stock, you’re “covered” (i.e. protected) if the stock rises and the call option expires in the money. If the option expires out of the money (i.e. worthless), you keep the premium you collected and still own underlying security. This provides an income stream or yield and also provides incremental downside protection as it reduces the effective cost basis of the stock.
The main drawback of buy-writes is it caps the upside or potential gains at the strike price of the options sold. If the underlying share price is above the strike at expiration the stock can be called away. Of course, an individual, or the funds we are going to look at, have the ability to adjust or ‘roll’ the call to a later expiration date and a different strike as a means of…
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