FAQ's

Q: How does the Parametric DeltaShift process select options?
A: Specific options are chosen based upon a proprietary process that emphasizes an option's "delta" — a metric that reflects the sensitivity between option premium and changes in the price of the underlying stock. The DeltaShift process is unique in the extent to which it carefully combines both risk and return considerations.

In general, the process employs multiple short-dated options with maturities generally between 2 to 3 months to minimize the potential event risk associated with longer-dated options that span several earnings cycles. Options sold generally have strike prices higher than the current stock price to allow for some stock appreciation. Listed options are chosen as they are preferable to over-the-counter (OTC) options from a cost perspective. (OTC options may provide greater flexibility in certain situations, but at a prohibitive and often hidden cost.) FLEX options are sometimes used to provide similar flexibility to OTC options, but in a listed contract.

Q: Does this strategy provide downside protection if the stock does poorly?
A: Covered call writing strategies do not provide downside protection beyond the premiums received for selling the call option.

Q: Can the program be terminated at any time?
A: Yes. The DeltaShift program can be terminated at any time. To unwind any outstanding call positions, they need to be repurchased (to close) in the open market. The cost of ending the strategy is generally low, but will vary depending on a number of factors.

Q: In what environments will this strategy do well?
A: Relative to a long-only concentrated stock position, the strategy does well if the stock price is flat or down during the period. Even when the stock price appreciates during the period, the strategy may result in a total return similar to that of the stock. Sharp increases in stock price will cause the strategy to underperform a long-only position, although in that case, both strategies will generally increase in value.

Q: Generally, what are the tax consequences of a covered call option?
A:
Option expires worthless: The premium received is treated as a short-term capital gain at maturity.
Option is exercised; stock is delivered: The premium is added to the total proceeds of the stock sale and is treated as a capital gain.
Option is repurchased prior to maturity: The gain or loss is treated as a short-term capital gain or loss.

Q: What is a qualified covered call option?
A: A qualified covered call (QCC) is generally defined as an option that, when written, is no lower than one strike in-the-money and has a maturity of more than 30 days and less than 33 months. Qualified covered calls may provide a limited exemption from the straddle rules.

Q: What is "delta"?
A: Delta is a transparent measure of option risk. It is the expected change in the value of an option for each dollar change in the underlying stock. Delta is a useful tool for selecting option contracts in order to balance income and growth potential. An option with a delta of 100% moves in lockstep with the stock price. Options with low deltas (< 20%) usually generate very small premiums and, in our experience, are generally not worth selling. Options with a delta greater than 40% may generate a relatively larger premium, but also have a higher likelihood of being exercised than a lower delta option.

Q: What is the difference between listed and OTC options?
A: Listed options are standardized contracts listed on an exchange. They offer liquidity and transparency in an open outcry market. OTC options are private contracts that may provide greater flexibility but at a potentially prohibitive price, especially for short-dated contracts. If non-standard terms are needed, we may use "FLEX" options, which are essentially listed options with flexible strikes and maturities and are traded in an open outcry market on an exchange.

Parametric Risk Advisors does not provide tax advice. Prospective investors should seek their own tax advice prior to entering into any options strategy.