Options strategies continue to prove popular with a growing contingent of advisors and investors. Troy Cates and Garrett Paolella, co-founders, managing partners, and PMs at NEOS Investments, recently discussed the portfolio benefits of these strategies. The pair joined host Todd Rosenbluth, head of research at VettaFi, for a webcast earlier this week.
Checking in On Markets
Hopes for a September rate cut led to the yield curve beginning to normalize in July. This follows a prolonged period of inversion while rates rose and remained elevated. It creates an evolving outlook within fixed income and related options strategies.
Meanwhile, despite market predictions, equities largely offered notable outperformance in the last year. This performance caused uncertainty for many investors regarding how to determine the floor and ceiling for volatile, rising prices, particularly within options. The 50-, 100-, and 200-day moving averages for major equity indexes provide guidance for these levels. These levels were apparent in the period when equities sold off in April, falling to a floor near the 100-day moving average.
Option positions generally indicate where the support and resistance levels lie for prices. Options investors tend to cluster in long and short positions around these levels, thereby playing a role in equity prices.
“It isn’t really just total price action but where are the support and resistance levels, and how is the options market supporting that,” explained Paolella.
The Proliferation of Options-Based Strategies
Options offer several benefits to portfolios. These include income generation, tax efficiency, hedging risk, low correlations, and more. The proliferation and popularity of options-based ETFs continue this year as investors seek to diversify beyond traditional stocks and bonds when seeking income.
NEOS reported nearly $4 billion in inflows to options-based ETFs in the last month, as of 07/01/2024. Year-to-date, these strategies brought in over $25.6 billion in inflows.
Advisors considering investing in an options-based ETF for clients may be looking for a range of outcomes. Cates explained many say “’ I’m looking for something that maybe plays defense, or something that’s a little more on the offense side, or maybe we’re just looking for more income, higher yields, more tax-efficiency.”
The NEOS suite of options-based ETFs focuses on high-income combined with enhanced tax efficiency for investors. The firm is solely an options investor, with a long history of pioneering options-based ETF strategies.
Under the Hood of NEOS's Tax-Efficient Options Strategy
NEOS combines layers of tax efficiency for investors. All of the NEOS income ETFs use Index options. Beyond providing liquidity, NEOS makes use of options that qualify as Section 1256 contracts under IRS rules. At the end of the year, regardless of how long an option was held, it’s treated as if sold on the last market day of the year at fair market value.
Any capital gains or losses receive a tax treatment of 60% long-term and 40% short-term. This treatment occurs regardless of how long the strategy invested in the options. This provides notable tax advantages for investors.
In addition to favorable tax treatment, a portion of distributions are return of capital. These receive special tax treatment by allowing for tax deferment on any RoC income. This gives investors better control over their taxable income within a given year.
NEOS also engages in tax-loss harvesting throughout the year on the options. Combining the layers of tax efficiency provides investors with the opportunity to make the most of income earned from core allocations.
The firm currently offers 5 options-based ETFs for core portfolio allocations. These include the NEOS S&P 500 High Income ETF (SPYI ), the NEOS Nasdaq-100 High Income ETF (QQQI ), and the Russell 2000 High Income ETF (IWMI ) within equities. Within bonds, the firm offers the NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI ) and the NEOS Enhanced Income Aggregate Bond ETF (BNDI ).
For more news, information, and analysis, visit the Tax Efficient Income Channel.
