A hot March CPI report sparked heightened market volatility as investors weigh the ever-changing interest rate narrative. For investors looking to position their portfolio amid ongoing uncertainty, options strategies that benefit from increased volatility are worth consideration.
Rising interest rates and inflation ushered in a new era of increased market volatility. The removal of the "Fed put" in markets and the artificial volatility suppression it created now opens a window of opportunity for several strategies that capitalize on volatility.
“We certainly have seen over the last couple of years that broader equity market volatility has shifted into a higher range,” Michael Buckius, CFA, president, CEO, and CIO of Gateway Investment Advisers, explained in a video on 2024 equity volatility investing. “Actually, it’s a more normal range if you look at a longer span of history.”
Volatility Creates a Beneficial Environment for Options Strategies
Option writing strategies benefit when volatility increases, driving up the prices of the options. This, in turn, creates greater premiums earned for those writing options and higher income potential.
See also: 3 Benefits Options Strategies Bring to Your Portfolio
“The other feature that’s changed that has helped make options prices more expensive is the higher level of interest rates,” said Buckius. Should rates remain higher for longer, options strategies would continue to benefit.
Even in an environment of rate cuts, the interest rate is highly unlikely to return to 0% as it was at the onset of COVID-19. This means volatility will remain higher than it was previously, even if rates come down.
“I do think volatility is going to stay at this higher level,” he explained. Geopolitical risk, an election year, the Federal deficit, rate levels and direction, and equity concentration risk all add pressure to 2024 markets. Investors looking to position their portfolio for volatility would do well to consider options strategies that benefit in volatile, high-rate environments.
Quality Equity Exposure Alongside Options Income Generation
Gateway Investment Advisers, an affiliate of Natixis Investment Managers, brings more than 45 years of options-based investing to the table. The Natixis Gateway Quality Income ETF (GQI) seeks reliable cash flow derived from options premiums and equity dividends.
GQI offers exposure to quality stocks within the S&P 500 that generate cash flow and strong balance sheets. Companies must also demonstrate consistent earnings and profitability. The equity exposures are complemented by a laddered call option strategy on the S&P 500 index. The options overlay half the portfolio, allowing the other half to participate in market upswings. This balances income potential with capital appreciation.
The fund strengthens a portfolio’s equity allocation by adding risk-adjusted exposure. It’s also noteworthy as an alternative to dividend yield strategies within the income sleeve. GQI is actively managed, fully transparent, and has an expense ratio of 0.34%.
For more information about all-weather portfolio construction and quality investing, be sure to register for the upcoming webinar sponsored by Natixis on April 30, 2024.
For more news, information, and analysis, visit the Portfolio Construction Channel.
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