Portfolio Manager Perspectives

Jeff Benjamin

Giving up possible upside but getting more-predictable income

RiverNorth manager Metz sells calls with volatility in mind

Nov 12, 2012 @ 3:48 pm

By Jeff Benjamin

buy-write, options, equities
+ Zoom

The latest offering from RiverNorth Capital Management LLC will give up some of the market's potential upside in exchange for more-predictable income.

The strategy employed by the RiverNorth Dynamic Buy-Write Fund Ticker:(RNBWX) could be ideal for skittish investors anticipating a period of rising volatility.

The predictable part of the performance, sometimes described as the cushion, comes from the sale of call options on the underlying portfolio of mostly large-cap-growth stocks.

From an investor's perspective, the sale of call options represents an income stream that you can't get merely by owning the stocks.

However, those owners of call options retain the right to purchase stocks from the portfolio at a preset price, which means the portfolio's performance will be capped, ultimately creating a low-volatility alternative strategy.

Eric Metz, manager of the fund, plans to take the basic buy-write model a step further by managing the sale of call options with volatility in mind.

Thus, instead of simply selling new call options when older options expire, Mr. Metz essentially will be playing the volatility, because volatility is a key component that determines the price of a call option.

As Mr. Metz sees it, the underlying securities in the fund, which represent a proxy for broad equity market exposure, are less important than the management of the option sales.

“Traditionally, this strategy just buys the S&P 500 and sells a front-month call on that, but I'm not just turning over the options when they expire,” he said. “The implied volatility moves every day, and we will be managing the portfolio to have the best volatility picture, because the price of the security and volatility don't move in tandem, even though they are correlated.”

RiverNorth, which has $2.3 billion under management, manages three other mutual funds that all invest in closed-end funds, two of which are closed to new investors due to capacity constraints.

The buy-write fund represents the company's first fund that does not invest in closed-end funds.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

INTV

Special Needs Special Planning

Financial adviser John Nadworny’s path to help his son James led to his business focus on special needs planning.

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Video Spotlight

Path to growth

Video Spotlight

Path to growth

Latest news & opinion

With margins crashing, broker-dealers look to merge: report

Increased regulation is straining profit margins among broker-dealers, sending many of them into the arms of their bigger brethren.

Hackers may have profited from SEC breach

The hack of the agency's Edgar filing system occurred in 2016, but the regulator didn't conclude until last month that the cybercriminals may have used their bounty to make illicit trades.

Top 10 financial firms ranked by investor satisfaction

Find out which firm took the top slot for overall investor satisfaction for the second year in a row.

What not to say to clients when the markets drop

Here's what advisers should steer clear of saying the next time stocks turn downward.

SEC bars former rep for alleged share price manipulation

George Thoreson tried to keep penny stock's price high to enable Nasdaq listing.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print