Advanced technology has opened the door to automated portfolio management and systematic implementation of option-based strategies within institutional portfolios, mutual funds, and exchange-traded funds.

Large independent investment advisors and wealth managers are implementing automated option overlay strategies within their retail client managed accounts, according to Doug Bremer, managing director of SpiderRock Advisors, a Chicago-based provider of technology and institutional sub-advisory services. The strategies are meant as a key portfolio solution for targeting higher risk-adjusted returns, enhancing portfolio yields, and for providing real-time portfolio safeguarding against volatility and principle loss.

“The idea is that vanilla and complex option strategies are being fully automated from strategy construction and trading, to dynamic portfolio risk management, to real-time strategy management using advanced financial technologies and outsourced expertise,” Bremer told Markets Media.

Robo/digital/automated investment services are adopting option strategies as a critical product differentiator and complement to their passive ETF portfolios, he added.

Institutions and wealth managers are including option strategies as a key ingredient in portfolio construction for their managed accounts. “They are leveraging the ability to fully outsource the implementation and management of these strategies to technology based sub-advisors who can scale the strategies over hundreds of thousands of accounts to any number of custodians,” said Bremer.

A covered call, in which the writer of the option owns the underlying asset, is the most actively used and consistent means of risk-adjusted performance. There is an embedded ability to harvest the difference between implied volatility and realized volatility. Although covered calls are considered one of the more conservative options strategies, they aren’t entirely risk-free. Selling call options limits upside potential: if the stock price rises, the options will be exercised and the writer will have to sell at the below market strike price.

There exists a growing demand for agile and complex systems that can capture and measure data instantly, and to derive models for pricing and trading options. Firms are recording huge quantities of data in real time and detecting key market variables via sensors embedded in the systems. These sensors are able to actively detect actionable live signals, which when compared with historic models ultimately empower better investment and trading decision-making.

SpiderRock provides order management tools that automate the process of originating strategy-based trading ideas, delivering orders to the market, and allocating executions back to appropriate client accounts.

Featured image by Dollar Photo Club