Investors holding individual company stocks are finding Wall Street’s record highs make options strategies increasingly appealing. These strategies help manage single stock risks while generating income and diversifying portfolios.
Though covered calls aren’t new, portfolio managers note a rise in their use among individual investors with significant tech stock holdings, baby boomers, and corporate executives holding large amounts of company shares.
Advisors and managers are helping clients reduce single stock exposure by implementing customized covered calls. This approach allows for gradual stock sales, portfolio diversification, and effective tax management.
In covered call strategies, investors sell call options on their owned stocks to earn additional premium income.
A call option provides the buyer the right, without obligation, to purchase the stock at a predetermined price in the future. The premium earned can purchase a put option, offering the right to sell and protect against losses.
Portfolio managers estimate that up to $15 trillion in concentrated stock positions are suitable for covered calls and similar strategies.
“Market concentration is significantly higher than in the past, leading to more cases,” said Jake Marriott, options portfolio manager at Aptus Capital Advisors.
“The rise of ETFs and options-based products is enlightening people to the possibilities and uses of options,” he added.
The S&P 500 has surged 30% since April’s downturn, up 10% this year, fueled by AI-related tech stocks and impressive performance from defense software firm Palantir Technologies. This leaves investors contemplating how to handle these gains.
Aptus structures trades with shorter durations for about 50 individual clients’ separately managed accounts (SMAs), aiding in managing risks from diverse stocks like Amazon, Nvidia, Lowe’s, and Walmart.
SMAs are direct ownership investment portfolios managed by professionals. Cerulli Associates predicts this market will grow to $3.15 trillion by 2025, from $2.75 trillion in 2024.
“Advisors are excited to finally have solutions for previously immovable positions,” said Aptus’ Marriott.
The profitability from selling options depends on stock or market volatility—higher volatility means higher potential income.
Active covered calls, often traded in client accounts with other assets, are not publicly disclosed, so data is limited. However, their popularity is clear from the growth of derivative income-focused ETFs, which reached $150 billion in July, up from $7 billion in January 2020, according to Morningstar Direct.
In the year’s first seven months, these funds attracted over $40 billion, $22 billion more than the same period in 2024.
“If you’ve profited significantly from a single stock, diversifying without a large tax bill is a key consideration,” said Tom Lee, chief investment officer at Parametric Portfolio Associates.
Investors might sell covered calls conservatively to retain premiums and shares, especially those needing retirement income.
“Tax-efficient strategies will likely grow as home offices and advisors adopt them,” said Michael Manning, research analyst at Cerulli.
For diversification, investors can sell covered calls near the money. If the stock surpasses the call strike, losses offset taxable gains from selling some underlying stocks.
“It enforces discipline,” said Chris Murphy, co-head of derivatives strategy at Susquehanna. “It reduces volatility exposure, sacrificing some upside but stabilizing in all scenarios.”
Firms like Gateway Investment Advisers are expanding to meet demand, acquiring Belmont Capital Group for customized options strategies for SMAs.
“The expansion by major asset managers indicates we’re just beginning,” said Eric Metz, chief investment officer at SpiderRock Advisors, a BlackRock subsidiary.
