Options Trading Strategies to Counter Market Volatility

  • Fund manager Barry Martin uses high quality stocks and call options to give investors extra income.
  • Martin told Insider he buys big revenue-generating companies and then sells covered calls on the same stocks.
  • He says this gives his portfolio additional stability and investors respond as volatility rises.

Investors often struggle to make the stock market


volatility

work in their favour. Barry Martin has learned how to make it profitable.

Martin’s fund at Shelton Capital uses a combination of stocks and options to capture incremental profits and minimize losses during market declines. According to Morningstar, it has generated annual returns of 11.3% over the past decade, beating nine out of 10 derivative income funds.

The approach is relatively simple, but it is thorough. Martin and his team buy stocks that they believe will provide stable returns in all weathers. To do this, they focus on investing in quality companies with strong free cash flow. But they add another step by selling calls on all the stocks they own.

“Where I really believe we add value is by selling covered calls,” he said. “As volatility increases, we receive more for selling those calls. So not only do I have quality names in a portfolio, but what we’re doing is generating more revenue by selling covered calls.”

In other words, he sells options that give the buyer the right to buy the stock within the next 45 to 60 days if its price appreciates or if the buyers think the price will rise.

Generally, these calls represent 10% out of the money, which means Martin can be a loser if the stock goes up 10% or more in that short time. And because of equity investments, it can also be burned by sharp price declines – which is why it focuses on quality stocks and household names, as these are generally safer investments. Its top holdings in the high-turnover portfolio include Microsoft, Apple, Meta Platforms and Amazon.

Despite this limitation, he says the call sell strategy offers an annual premium of 4% to 7%, which further enhances good times and makes tough times in the markets more tolerable. He says customers appreciate it as a safe and reliable way to create extra income.

“It reduces standard deviation and beta. It also generates yield,” he said of covered calls. “Now with the VIX in the mid 20’s approaching 30’s we are able to generate more to sell calls, and also to sell calls that are more out of the money giving more room to run for equity underlying.”

And Martin says investors are taking notice, with capital inflows increasing dramatically thanks to increased volatility and because Wall Street is convinced that interest rates are about to rise.

“People are looking for income alternatives and this fits right in with that,” he said. “If you look at a typical 60-40 portfolio, we’re starting to see clients taking 10% of the fixed income allocation and 10% of their equity exposure and moving them to a 50-30-20, where we would be the 20% slice.”

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