Are Options a Core or Satellite Component of Portfolio Management?

Today I had the pleasure of moderating a panel at the OIC Financial Advisor Forum which was running concurrently with the 34th Annual Options Industry Conference. My panel was on the presidential election cycle and market volatility with a combination of a political expert and two individuals involved in money management. I enjoyed the challenge of trying to integrate the markets and politics into a single common themed discussion. Despite being immersed in thinking about my own moderating duties today, there was something that I heard a couple of times from other presenters that has me questioning where institutional use of options falls on the spectrum of commonality.

My thought process got going early in the day when one presenter said that he has a core money management philosophy and that option used is a ‘satellite strategy’. His meaning behind this was he would periodically try to enhance returns through selling options, but it was not an everyday part of his portfolio management process.  I’d never heard that phrase before, but it was not the last time it would be used at today’s sessions.

Later in the day, a presenter said that selling index options against their portfolio was their core strategy and the weighting of the short index option positions was based on some statistical or technical factors. Since I work at CBOE I liked the sound of that. However, the phrase ‘satellite strategy’ was used by this manager who stated they used individual equity options opportunistically or for hedging individual stock positions that they may be concerned about.

Finally, during my panel, I decided to throw the question out there as to whether the money managers on the panel felt that options were more commonly a core or satellite (or neither) strategy. A response that I can’t argue with was that option usage is probably in the 3rd inning of becoming commonplace for all investment managers. I think that about sums it up, options still have a long way to go, but many sharp and educated portfolio managers have already moved it to the core of their business.