“I don’t know why this strategy isn’t written about more in the press,” Marty Sass innocently remarked. “Maybe it sounds too complicated.”
The strategy to which Sass referred is “covered call option writing against attractive equities with growing dividends combined with the purchase of index put options for downside protection.”
Not complicated at all.
While it might sound facetious, when the CEO and chairman of independent investment management firm MD Sass with $8 billion under management, explained the strategy, it really is easily understood.
“It has three ingredients,” Sass told ThinkAdvisor on Thursday. “The first is buying undervalued, high quality stocks with better yields than the S&P 500 delivers. The second is selling covered calls with attractive premiums out of the money. The last is buying index puts out of the money for additional downside protection.”
It currently results in cash flow from dividends that average 2.5%, compared with 2.1%the market is currently yielding. The option premiums result in added income of 8.8% annualized. Combine the two and the client is currently looking at 11.3% annualized. Take 1% away for the cost of the index put protection and 75 basis points for the funds fee, and it results in a net annualized return of around 9%.
“And that’s just if the markets stay neutral,” Sass (left) added. “Even if the market deceases, the put options and cash flow provide a great deal of cushion.