An Equity Alternative: Cash Secured Put Selling

Key Takeaways

Cash secured put selling offers a new income source with potentially lower downside risk than traditional equities.
Simulations show improved risk-adjusted returns when combining this strategy with traditional income portfolios.

A cash secured put selling strategy can offer an alternative source of income generation for portfolios, with potentially lower downside exposure than traditional equity allocations

Traditional income generating portfolios tend to rely on higher dividend yielding equities, longer maturing fixed income instruments, or a combination of, to produce returns. In 2022, with the rise in long-term interest rates, equity market drawdowns, and the corresponding increase in correlation between stock and bonds, this approach has produced higher volatility and lower returns than expected.

A cash secured put selling strategy can offer an alternative source of income generation for portfolios, with potentially lower downside exposure than traditional equity allocations, by generating income through a combination of options premiums and short-maturity money market instruments.

To illustrate, we simulate the historical potential portfolio benefits of a cash-secured equity put selling strategy on the S&P 500, when combined with a traditional income focused balanced allocation (Figure 1).

We find that over the period examined, risk-adjusted returns are improved when the simulated put selling strategy is substituted for the equity exposure. We also find that standalone downside capture of the put selling strategy is lower than both the equity and balanced portfolio in most of the highlighted periods of market declines (Figure 2).

Figure 1: Simulated Portfolio Returns [1]

How it works:

A cash secured put selling strategy generates income through a combination of premiums collected from selling put options, and reinvesting the cash held as collateral in short-term money market securities. The put selling index referenced within the simulation, systematically sells 1 year expiry 10% out-the-money put options laddered quarterly, on the S&P 500 underlying. This provides rolling downside protection of -10% before options premiums and investment principal are put at risk contributing to the defensive properties of the strategy.

Figure 2: Downside Performance Scenarios

What are the risks of investing in a traditional income focused balanced allocation?

Fixed income portfolios may fail to provide sufficient diversification to a portfolio in stressed market environments.
Investors must take on the higher volatility of equities and longer maturity bonds to generate the desired income through dividends payments and coupons.
Inflationary periods can drive poor performance for both stock & traditional bond portfolios.

How does a cash secured put selling strategy help manage those risks? (Figure 3)

Improved diversification when undesirable correlation between stocks and bonds occurs.
Differentiated income stream through harnessing the volatility risk premium inherent in options.
Higher potential for positive risk adjusted returns in periods of poor risk asset performance.

Figure 3: Summary of Simulated Risks and Returns

Source: Bloomberg and Ninepoint calculations, quarterly rebalanced using quarterly data 2007-06-29 to 2022-12-21

[1] Income Focused Balanced Allocation: 6% SPTSX High Dividend Index (TXEITR), 30% TSX Composite (0000AR), 24% MSCI ACWI Local Currency Equity Index (NDLEACWF), 39% Bloomberg Barclays US Aggregate Bond Index CAD Hedged (LBUSTRDH), 1% FTSE Canadian 1 month Treasury Index (SPFICTBT).

Equity Stand Alone Allocation: 10% SPTSX High Dividend Index (TXEITR), 50% TSX Composite (0000AR), 40% MSCI ACWI Local Currency Equity Index (NDLEACWF).

Cash Secured Put Selling Strategy: RBC US 90 Strike Put Selling Strategy (RBCUS90P) quarterly return + Canada Bankers Acceptance 1M Maturity Index (CDOR01) beginning quarterly yield calculated as a total return.

[2] Sharpe Ratio: Annualized Total Return of allocation minus annualized return of FTSE Canada 1 month Treasury Index divided by standard deviation

All strategies are rebalanced to the specified allocations on a quarterly basis with graphs and charts depicting quarterly timeseries.

For illustrative purposes only and is not indicative of future performance. Subject to change without notice.

NPP5002

(Series F)

Ninepoint Target Income Fund

Mutual Funds Exchange Traded Funds Equity

$9.92 $0.01 (0.06%)

As at 1/14/2025

Growth of $10,000 Invested as at 12/31/2024

Performance as at 12/31/2024

1 Year
5.17%

3 Year
-

5 Year
-

10 Year
-

Incept.¹
5.82%

¹ Inception Date 8/2/2022

Go To Fund

All returns and fund details are a) based on Series F shares; b) net of fees; c) annualized if period is greater than one year; d) as at 11/29/2024, e) 2022 annual returns are from 08/02/22 to 12/31/22. Top ten holdings, sector allocation and geographic allocation as at 11/29/2024. Top ten holdings based on % of net asset value. Sector allocation based on % of net asset value. Numbers may not add up due to rounding. Cash and cash equivalents include non-portfolio assets and/or liabilities.

The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values of the investment fund or returns on investment in the investment fund.

*The monthly distribution amount may be adjusted by the Manager without notice throughout the year as market conditions change. Monthly distributions will be comprised of net income, net realized capital gains and/or return of capital. Any net income and/or net realized capital gains earned by the Fund in excess of the monthly distribution will be distributed to unitholders annually in December.

The Fund is generally exposed to the following risks: capital depletion risk; concentration risk; currency risk; cybersecurity risk; derivatives risk; foreign investment risk; inflation risk; interest rate risk; liquidity risk; market risk; securities lending, repurchase and reverse repurchase transactions risk; series risk; short selling risk; substantial securityholder risk; tax risk. Additional risks associated with an investment in ETF Series securities of this Fund include: absence of an active market for ETF Series risk; halted trading of ETF Series risk; trading price of ETF Series risk.

Ninepoint Partners LP is the investment manager to a number of funds (collectively, the “Funds”). Commissions, trailing commissions, management fees, performance fees (if any), and other expenses all may be associated with investing in the Funds. Please read the prospectus carefully before investing. The indicated rates of return for series F units of the Funds for the period ended 11/29/2024 are based on the historical annual compounded total returns including changes in unit value and reinvestment of all distributions or dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Funds.

The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Fund may be lawfully sold in their jurisdiction.

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The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP (“Ninepoint”) and are subject to change without notice. Ninepoint makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances.

This document is for information purposes only and should not be relied upon as investment advice. We strongly recommend that you consult your investment professional for a comprehensive review of your personal ﬁnancial situation before undertaking any investment strategy. Information herein is subject to change without notice and Ninepoint is not responsible for any inaccuracies or to update this information.

Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint Partners LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.

The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their ﬁnancial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.