Management of concentrated stock positions is one of our specialties
“Covered call writing can help you generate income on your existing stock holdings….but options can be complex and intimidating. We’re proud that our OPTIC program allows us to bring this powerful strategy to our clients efficiently.”
Brad Gwilliam, Co-Founder
When you’ve got a concentrated stock holding, it needs to be managed carefully. But in addition to watching it and hedging it as necessary, did you know it can also be generating additional revenue for you?
At Watts Gwilliam & Company, the management of concentrated stock positions is one of our specialties. For decades, we have been helping people like you manage and optimize these positions.
Get Your Money Working Harder For You
If you’ve got a home sitting empty, what can you do to make it work harder for you? You can rent it out. Well, you can apply this same concept to your stock positions, too. If you own a large stock position, we can help you turn that asset into an income generator.
The OPTIC Program (Options for Income Creation)
Writing call options (known as “covered calls”) against a position is a conservative method of generating income. This allows you to sell, or “write”, options on your stock position in exchange for a cash payment (“the premium”). Often the option expires worthless, allowing you to pocket the entire premium. Sometimes the option will end up “in the money”, requiring you to sell your position. We can either sell your existing stock or if you prefer to avoid capital gain issues, we can buy additional shares in the market to deliver for the call. After the option expires, this process is repeated, generating an ongoing cash flow.
It’s a significant amount of work to analyze, purchase, and monitor the options manually. So we’ve developed a proprietary computer model that helps make sure this process is handled efficiently. This sophisticated program helps ensure that all options are written according to the parameters you set upfront.
Using our OPTIC program, you can:
- Generate an ongoing income stream
- Continue to receive dividends and maintain voting rights
- Participate in some of the upside appreciation if price rises
- Hedge your downside exposure through additional income
Using OPTIC to Sell Large Positions
Selling large positions is not easy, and it can be easy to wonder if you could have done better. That’s why we use the OPTIC program as a tool for making disciplined selling decisions.
This way, you can implement a planned, disciplined approach to selling a large position over time.
An Example of the OPTICS Program at Work
John has worked as a manager for XYZ Corp for 18 years and, in the process, has acquired nearly 35,000 shares of the company’s stock. His goal is to continue holding the stock until it reaches a more favorable sell price. John has become frustrated watching the position rise and fall with the market and wants to evaluate alternatives to enhance the return on the idle stock position.
Using our OPTIC program, John is able to generate an income stream from his stock position, in addition to collecting dividends. We work together with John to identify the best option strategy to meet his goals.
After a discussion with his Watts Gwilliam advisor, John decided to sell options for 10,000 shares based on a sales or “strike” price of $30, 10,000 shares at $32.50, and 10,000 shares at $35. A customized OPTIC program was put in place, giving John an average sales price of $32.50, 25% above the current market price of the stock. John received an immediate income of $13,800 while the model projects a total annual income of $22,000.
If the stock price doesn’t reach those targets, John simply keeps the option premium ($13,800) and the options expire worthlessly. If the stock increases and reaches one of the “strike” prices, then John keeps the option premium and realizes a profit on the sale of the stock. (If John doesn’t want to sell the stock and realize the capital gain, we can go out and buy stock in the market to deliver as an option.)
The charts below summarize the outcome of John’s strategy. As you can see, the higher the price you set, the less option premium you’ll collect…but the less chance of having the stock “called away”.
The following chart graphically displays the outcome of the strategy based on changes in the desired target price. As the average target price increases, income decreases.
John continues for five years, generating income from his position. Then he reaches a point where he wants to sell half of his position. We then use the OPTIC program with a goal to sell the shares (instead of simply collect premium). John’s shares are sold within his target range over a period of six months. Over that time, John collects an additional premium that supplements the sale proceeds.
Is the OPTIC Program right for you?
- You have a concentrated stock position that meets a minimum requirement of the lesser of 10,000 shares or $500,000 market value
- You’re looking to generate income off the concentrated stock position
- You’re comfortable either selling all or a portion of the position or speculating on the stock remaining under a target price
Frequently Asked Questions
Q: Won’t this program create a huge tax bill for me if the stock is “called away”?
A: Many of our clients have a very low-cost basis in their stock positions, so we understand the need to avoid having those shares called away, which can create a large tax bill.
The OPTIC program uses listed options to execute its strategy. Listed options are American style options, which means that it is possible for shares to be exercised prior to the maturity of the option. This rarely happens. However, if you prefer to retain your shares, Watts Gwilliam & Co. will buy stock in the open marketplace to deliver if your options are exercised. This is a simultaneous transaction that is normally cash flow neutral.
Q: I currently have a margin balance against my shares. Are they still eligible for the program?
A: Yes. In fact, many of our clients use the OPTIC program to hedge the cost of margin interest.
Q: Can I terminate the strategy before the options expire?
A: Yes. However, doing this may require closing option positions at a loss. There is a chance that this loss could exceed the upfront income that was earned at the onset of the strategy.
Q: Is this strategy available in retirement accounts?
A: Yes. Selling covered call options are approved for most retirement accounts, including IRA accounts.
Q: Can the strategy be used on my unexercised employee stock options?
A: Yes. However, the following terms must be met:
- You must have options that are vested, in-the-money, and expire in no less than one year
- You must understand the added risks of investing in naked options
- You must collateralize the program’s short option position with sufficient assets
- Watts Gwilliam & Co. may request duplicate quarterly statements detailing the status of your employee stock options.