Stock Put Writing Program & Stock Put Credit Spread Option Program
Vision Advisors provides its clients with an alternative trading strategy that is designed for investors seeking aggressive returns. It is suitable only for those investors who can bear a high risk of loss, and who are suitable for active and short-term option trading, which includes the use of leverage in holding short put option positions and short put option credit-spread positions. For these investors, Vision Advisors offers the Stock Put Writing Program (SPWP) and the Stock Put Credit-Spread Option Program (SPCSOP).
Clients in these portfolios must have “Speculation” or “Capital Appreciation” as their primary objective and their risk tolerance must be “Aggressive” or “Speculative”. Clients should allocate no more than 20% of their total investable assets into these portfolios. (Vision Advisors has additional portfolios that could be utilized for the balance of a client’s investable assets.) Clients who are age 65 or older should not allocate more than 15% of their investable assets into these portfolios.
Vision Advisors seeks to achieve an aggressive return for investors in the Stock Put Writing Program, by employing a strategy of writing (selling) put options on a group of common stocks. A client enters a typical trade by selling an out-of-the-money put on a given stock and receiving a premium in exchange for agreeing to purchase 100 shares of that stock at the strike price any time before the expiration date of the option. If the underlying stock price does not drop below the strike price of the option, the option will generally decay in value over time and expire worthless on the expiration date. The premium collected for writing the option becomes the short term profit for that trade. If the stock price drops below the exercise price, then the option is subject to being exercised. In that case, the stock would have to be purchased at the strike price, which would be higher than the current market price of the stock. A client is not required under applicable margin rules to maintain in his/her account sufficient equity to fund assignments on all the client’s short option positions. However, should the client be exercised on a short-put position, the cost of funding the resulting assignment of the stock may exceed the account’s free available margin and result in a margin call, which would likely result in liquidating the stock position at a loss. The Stock Put Writing Program is a leveraged investment and should only be considered by investors with a high risk tolerance.
Vision Advisors seeks to achieve an aggressive return for investors in the Stock Put Credit-Spread Option Program, by employing a strategy of writing (selling) put Credit-Spread options on a group of common stocks. By entering into a spread position, under applicable margin rules, the initial margin that is required will be less than the total maximum potential loss on the spread position. Therefore, the Stock Put Credit Spread Option Program is a leveraged investment and should only be considered by investors with a high risk tolerance.
Clients in both of the above programs will be required to open margin accounts with Vision Financial Markets LLC (“VFM”) or with a third-party firm. Margin accounts allow for substantial leverage and clients will therefore be responsible for maintaining adequate levels of margin. If the market moves unfavorably, clients may be required to deposit additional margin on short notice to maintain their open positions. Also, clients should be aware that they will have limited ability to withdraw amounts deposited as margin while option positions in their accounts remain open.
Clients who open margin accounts will be provided with the full margin disclosure documents. Margin clients should be aware of the following:
- They may lose more funds than are deposited In the margin account;
- VFM, Vision Brokerage Services, LLC (“VBS”) or third party firm can liquidate any short option position or any other security to cover a margin deficiency;
- VFM, VBS or third-party firm can liquidate positions without first contacting the client;
- Clients are not entitled to choose which securities or other assets in their account(s) are liquidated or sold to meet a margin call;
- The loss on a given short spread is limited to the difference between the two strike prices less the net premium received, after execution charges and any other transaction costs;
- VFM, VBS or third-party firm can increase its “house” maintenance margin requirements at any time and are not required to provide advanced written notice to clients; and
- Clients are not entitled to an extension of time on a margin call.
Clients in both of the above programs will be required to be approved for writing uncovered options. Clients will need to be approved for Level 3 options trading in order to write puts and for Level 4 options trading to write uncovered puts. Clients who utilize puts on indexes must be approved for Level 5 options trading. Those clients who open option accounts will be provided with a copy of the brochure Characteristics and Risks of Standardized Options (and any supplements) prior to being approved to trade options. Clients will also receive margin and uncovered options disclosure forms. Please note: Options involve risk and are not suitable for all clients.
Vision Advisors will first identify companies that it believes have a strong tendency to trade at or above their current market price (these may be the same stocks that Vision Advisors uses in its other portfolios). The portfolios seek to achieve trading profits by entering into the short-put options trades at higher prices than when the positions are liquidated (closed) or the option positions expire worthless. Of course, an investor should fully understand that a drop (especially a sudden large drop) in the respective stock price will cause losses on the stock option position and, at times, those losses could be greater than the total potential profit on the option transaction.
Leverage is a significant part of the investment strategy and creates the risk that a declining stock price - in the case of writing puts — may result in a loss greater than the amount deposited as margin. Moreover, a stock that is trading below the strike price, in the case of a short-put, can and may incur potentially substantial losses in a short period of time. The price of a stock may fall to zero, and the loss in the client’s account will be the cost of purchasing the stock at the strike price (far surpassing the value of the margin deposited in the account and the premium income received). If a client purchases a put, it gives the client the right to sell the underlying stock on or before the expiration date at the strike price. If a client sells a put, the client is obligated to buy the underlying stock at the strike price if the client is assigned. As a writer (seller of a put) the client has no control over whether the option will be exercised. Either type of position may be closed out before the expiration date thereby ending any right or potential obligation.
A credit spread is the simultaneous initiation of a short put option in combination with the purchase of put option at a lower strike price with the same expiration date. One side of the transaction is writing a put on the stock and receiving a premium, in exchange for agreeing to purchase the stock at the strike price at a future date. The other side of the spread is buying a put option. The buyer pays a premium for the right to sell the stock at the strike price at a future date. There are different kinds of spreads that can be used, each having different objectives.
Vision Advisors seeks to maintain a diversified portfolio of short options on various stocks that it believes will be more beneficial than limiting the option positions to just one or a few stocks.
In the Stock Put Writing Program, if a client desires to own shares of stock but also believes that the ownership of that stock should take place at a price that is lower than the current market price and is willing to wait until a future date, an option strategy can be employed. By writing a put option at a strike price below the current market price, it will offer the opportunity to potentially own the stock at a lower price by the designated expiration date of the option. The put writer receives the premium since he/she has now assumed the risk of loss if the stock moves below the strike price. If the stock price drops and the option is exercised, the net put premium will be used to lower his/her net cost on the stock when it is purchased at the strike price. If the stock does not trade below the strike price by expiration, the option will ultimately expire as worthless and the net put premium will be the profit on the trade. The put writer will be writing uncovered puts and will not own the actual stocks. It is not the intention of this portfolio to hold any stocks. If an option position is exercised and stock is purchased, it would most likely be promptly liquidated.
In the Stock Put Credit-Spread Option Program, Vision Advisors will engage in writing put credit spreads. In this spread transaction, both the profit and loss are limited. The spread is the difference between the higher and the lower strike price. This strategy is used when one anticipates that the price of the underlying stock is likely to move higher or remain in a sideways trading range, but remaining above the strike prices of the spread transactions, which will give it the opportunity to decay over time and result in a profitable trade. The reason the transaction is structured as a short credit spread instead of a naked put is to limit the potential of a loss on the transaction. Having a limited-loss feature also restricts the potential profit and adds transaction costs, because there are two option positions rather than just one.
The opportunities of the SPWP and SPCSOP Programs are:
- The potential to profit from natural time decay of out-of-the-money short put options;
- The potential to profit from an upward stock trend and/or from a sideways stock trend;
- Access to investment methodologies developed by Howard Rothman, Vision Advisors’ Chief Investment Officer (“CIO”). Mr. Rothman makes the ultimate investment selections or recommendations and actively manages the portfolios;
- Each client’s individual portfolio will be individually managed by the CIO; and
- Portfolios also offer the ability to trade Exchange Traded Funds (“ETFs”) and Indexes. If puts are going to be sold on an index, the client would have to first be approved for Level 5 options trading.
*Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (with 1997 through 2012 supplements), November 2012 supplement and April 2015 supplement to Characteristics and Risks of Standardized Options. Besides being accessible via our Web site, copies of the Options Disclosure Document are available from your Vision sales representative, or by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606.