Family Office strategic capital preservation and consistent income generation

When managing wealth for high-net-worth families, our philosophy shifts from "chasing alpha" to strategic capital preservation and consistent income generation. We view the derivatives market not as a casino, but as an insurance and yield-enhancement tool.

Think of options as contracts that provide flexibility. Here is the breakdown of these instruments through the lens of a long-term builder.

1. The Building Blocks: Calls and Puts

At their core, options are rights, not obligations.

• Calls: A Call option gives the buyer the right to buy a stock at a specific price (the strike).
  • Family Office View: We rarely "gamble" on buying calls. Instead, we often sell them (Covered Calls) against large stock positions to generate "rent" from our holdings.
• Puts: A Put option gives the buyer the right to sell a stock at a specific price.
  • Family Office View: We use these as insurance policies to protect a portfolio during market volatility, or we sell them to get paid for committing to buy a high-quality stock at a discount.

2. The Wheel Strategy

This is a favorite for steady wealth building. It is a circular process designed to collect premiums (income) while acquiring assets.

1. Step A: Sell a "Cash-Secured Put" on a stock you actually want to own. You get paid a premium.
2. Step B: If the stock stays up, you keep the cash and repeat. If it drops, you are "assigned" and buy the stock at a discount.
3. Step C: Once you own the stock, you sell "Covered Calls" against it. You collect more "rent."
4. Step D: If the stock rises and is called away, you go back to Step A.

3. Spreads: Managing Risk and Capital

Spreads involve buying one option and selling another simultaneously. This limits your "downside" compared to trading single options.

Debit Spreads (Buying)

You pay money upfront. You do this when you expect a moderate move in a certain direction but want to lower the cost of the trade.

• Bull Call Debit Spread: Buying a low-strike call and selling a high-strike call.

Credit Spreads (Selling)

The market pays you upfront. This is a "probability" play where you bet that a stock won't hit a certain price.

• Bull Put Credit Spread: You sell a put and buy a lower put for protection. As long as the stock stays above your level, you keep the profit.

4. Bear Put Spreads

This is a specific type of Debit Spread used when we are concerned about a short-term downturn in a specific sector or the broader market.

• How it works: You buy a Put (to profit from a drop) and sell a further out-of-the-money Put (to offset the cost of the first one).
• The Goal: To hedge a portfolio against a "bear" (downward) move without the high cost of buying "naked" puts. It turns a binary bet into a structured, cost-efficient hedge.

Summary Table for the Long-Term Investor

Advisor’s Note: In long-term wealth management, we prefer being the "House" (selling options/collecting credit) rather than the "Player" (buying options/paying debit). Time decay (Theta) becomes your employee, working for you every day.