Stock Options to back up a mutual fund?

Question

Can stock options be used to bolster a mutual fund? If so how?

Answer 1

I think what you're asking is how can I use options to hedge my mutual funds.

One of the most popular ways is to buy protective puts. That way if you have a large holding in mutual funds and the market pulls back like it did in May, your protective puts will increase in value and hedge you against the losses incurred in your mutual funds.

It'll reduce your returns a little on the mutual funds (since you have to pay for the puts somehow), but if you think there's a decent number of pullbacks that are part of the market fluctuations, then it'll more than pay for itself (like this year!)

Hope that helps!

Answer 2

Mutual fund buy and sell stock options constantly. That is funds managers job. Personally don't like mutual funds because they act in concert. This is technically illegal, but see no way to stop it from happening. An example would fund X is going to sell off very large block of stock Y They let mutual fund Y know before hand. fund Y sell options in stock Y knowing price will drop, and option will never get called.

Answer 3

Some conservative funds sell covered call options to increase revenue.

Scenario: stock "A" is selling at $20.

Mutual Fund owns 20,000 shares.

They might sell a call option for $25 per share for $1 per share.

They get $20,000 revenue now.

If stock never goes to $25 during the option period they retain stock. They just made $20,000 that they never would have.

Answer 4

There are specialize funds that have a strategy of selling options agains their portfolio holdings. ETB is one such fund with a current yield of 9.1%. Others are ETV, FFA, MCN. I am sure there are others but those are the ones I am familiar with. All pay dividends of around 9%. I suspect however that the dividends are not tax advantaged because they come from writing calls.