The foundation of this approach is a portfolio of carefully selected large-cap equities. We consider stocks from a wide universe (Russell 1000®) and conduct fundamental research to identify what we feel are the best 35-45 individual companies that have exchange-listed options. We sell covered call options against these underlying stocks in an effort to generate additional income and lower overall portfolio volatility.
When you manage a strategy, for over 50 years, you get approached for various special requests from both clients and advisors. Two consistent requests we have received over the years, and have responded to, are ways to maximize the income generation and/or increase the downside hedge protection. The Connors Covered Call strategy SMA can be managed in three distinct ways to meet our investors' specific objectives:
When we manage for "Total Return", we will partially write against our underlying holdings, selling O-T-M (out-of-the-money) covered calls against a range of 25% -75% of the total portfolio shares in order to generate additional total income and lower overall volatility. Often, we will decide to "buy back” and “roll” an option so we may remain invested in the underlying equity. Investors interested in this approach seek active management and to participate with equity markets but with less volatility and additional income.
When we manage for “Income Focus,” we will fully write against our underlying holdings, selling O-T-M covered calls against a range of 80%-100% of the total portfolio shares, in order to generate meaningful option premium income and lower overall volatility. Often, we will allow our stocks to get “called away” so we may keep the option premiums generated. Investors interested in this approach seek active management and want income generation through option premiums and dividends. Investors will participate with equity markets but with less volatility.
When we manage for “Defensive,” we will partially write against our underlying holdings, selling slightly O-T-M covered calls against at least 60% of the total portfolio in order to generate attractive option income which will finance put protection for a sleeve of the portfolio. The combination of covered calls AND protective puts should help dampen volatility during times of market drawdowns and uncertainty. Investors interested in this approach seek a more “conservative” equity approach and a strategy that provides an extra layer of downside protection to help cushion periodic drawdowns. Returns in this strategy will be muted in strong market environments.
The management team, after carefully selecting the underlying holdings, will then strategically and tactically write covered call options against the portfolio’s holdings, taking into account current market and individual stock developments. Active decisions are being made daily regarding the options-overlay such as:
Weighted average % out of the money
Weighted average days until expiration
Min: 30 days
Max: 180 days
Stock selection process and resulting style can best be described as a core blend inclusive of both growth and value equites. When analyzing possible candidates, the emphasis is on companies with:
|Fundamental quality||Proven management|
|Strong profitability||Reasonable valuation|
|Lower overall debt levels|
While this strategy can reduce upside potential in very strong equity markets, it brings in an immediate cash return and generally reduces portfolio volatility. The strategy should be considered a total return vehicle.