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Derivatives: Or… Can my Portfolio be Insured?

Derivatives: Or… Can my Portfolio be Insured?

Recently, many clients have noticed us speaking more and more about the potential need for life and disability insurance. In its simplest form, insurance is a contract offering protection to a possible outcome. So, is there any form of insurance when it comes to a client’s investment portfolio?

The answer is yes, and in this article, we will look at how this is done through a type of investment tool known as a derivative, or more specifically, an option contract. Not only do they protect investments from market volatility, but they also have the potential to earn some income from that same volatility.

How do options work?

One of the oldest forms of option contracts exists within the world of agriculture. A farmer plants his crop in the Spring but cannot bring it to market until harvest time in the Fall. He has no way of knowing with certainty what the price of his crop will be then, so he promises to sell that crop to his future buyer at a fixed price. He gives up his chance to make more if the price is higher in October, but he also protects himself from losing money if the price is lower. Likewise, his buyer locks in his cost at a fixed price and can therefore better predict how much profit he can earn when he turns the crop into a finished product (say, for example, boxes of cereal).

Options in the stock market can work similarly. Broadly speaking there are two types of options: calls and puts.

A call option gives the owner the right, but not the obligation to buy specific securities from a seller within a fixed period at a specific price. For example, if a stock price has risen to $12 and the call contract allows the owner to buy it for $11, she would then “call” the owner of the stock and buy it for the lower price.

A put option allows the owner of the option to force the seller of the option to sell the buyer a security for a higher price than it is currently trading at. Let’s say that the stock’s price has dropped to $22, in this situation the put option forces the owner to sell it for $23.

Why would investors use options?

Like the farmer in our original example, calls and puts act as a kind of “insurance” contract for security owners. The options must be bought and sold, so there is a “premium” cost to buying them, as well as a premium price that is collected by selling them.

Good options traders will use these contracts to protect their portfolios from unusually large short-term swings in the market. They give up some of the upside in a stock price in exchange for protecting their investment from a price drop. They also collect the premium on this insurance by way of selling the call and put contracts, increasing their potential income.

Why doesn’t everyone do this?

First, these options have a price. Not everyone wants to use portfolio insurance products or is willing to pay for this type of protection. Second, option contract writing is complex. Not everyone has the expertise or time, though it could be done on their own it would be nearly impossible. CH Financial has brought in talented fund managers that help us with this strategy. In addition to their complexity, it can also be hard to find someone willing to buy it from them adding another level of risk to the investor.

Who, among CH’s investment partners use them?

We currently use two managers who make extensive use of call and put options: Dynamic Alternative Yield and the BMO Tactical Dividend ETF fund. This is a large part of why they are classified as “alternative” investment strategies. Although retail investors can write their own options, it is almost impossible to do so because they do not have access to institutional investors to engage in an options contract with.


Options are not for all investors nor all investment strategies. For us, at CH we have seen these option strategies benefit our clients’ investment portfolios in the past and they will continue to do so moving forward. We see this as a part of our ongoing responsibility to find ways to reduce risks our clients face, like the life and disability insurance we offer to our clients. If you would like to discuss how this type of insurance within your investment portfolio has been helping to protect your investments, please reach out to us.

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We’re looking for aspirational clients who require the whole spectrum of financial services because managing the whole is how we’re able to deliver unbeatable value – it’s our “secret sauce.”If this describes you, let’s set up a meeting andget to know each other.

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We are with you for the long run and are not going anywhere. Jeremy has told us that at these times the numbers tend to scare you, but you haven’t really lost anything if you don’t panic and sell.

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With CH Financial since 1993

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When I became a client of CHF it was a real game-changer as I was going through a very difficult time both professionally and personally.

I went through a divorce and the loss of a job and a parent, all within a 12-month period. While it was very tough to deal with at the time, I was reassured by the fact that the team at CHF had my back and really cared about me and what I was going through.

Looking back now, I’m not sure how I would have managed without the support of the CHF family.

Jeremy and his team were there every step of the way to help me navigate my way through the complexities of a divorce and inheritance. They got me back on track both financially, as well as emotionally.

I have now been a client of CHF for over 10 years and thanks to their expertise, I know that my family will be well taken care of for many years to come. I am now in a position where I don’t need to worry about money thanks to a solid financial plan.

I would highly recommend the CHF team to others going through life-changing and difficult situations as your financial partner.

Linda, Victoria

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As an investment industry professional, I am constantly on the go and maximizing my peak career earning years in my 40s. With travel and work commitments I am very limited for time to spend with family and do the things I love to do and chose CH Financial to allow me more freedom and lifestyle balance.

Being in the investment industry my whole career and an extremely busy professional, I know I could probably do a good job at managing my money as I work in the industry after all while I rely on and trust the CH Financial team that they will take care of the details, both growing my assets as well as taking care of every aspect of my financial situation, including my tax, investments and insurance, they simply take away the stress of having to worry about it all and help me to navigate the complexities for me so it all meshes together and importantly saves me valuable time and headaches.

At the end of the day, the reality is I truly value my time and the opportunity cost of my time and would rather hire the best in the industry so ultimately my wife and I can do the things that we love to do, have more leisure time, relax and enjoy spending time in the great outdoors, exploring new countries, hiking in the mountains and volunteer work.

Since engaging CHF more than 5 years ago we have enjoyed significant growth in our investments but more importantly, we have peace of mind and sleep much better at night knowing the team at CHF has our financial back and anything financial they will take care of for us.

I would have absolutely no hesitation in recommending the team at CHF to other career-focused busy professionals who really value their time and lifestyle balance.

Kevin & Sharron, Calgary

Financial industry professionals

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Prior to joining CH Financial as a client, I had been partially managing our investments and using a bank-owned broker for many years, with moderate success. When we became clients of CHF, I quickly realized how little I knew about the complexities of managing investments and the importance of seeking out the best specialists in the industry to assist with my family’s full financial picture.

Brian and the team at CHF encouraged us to take an introspective look at our assets and expenditures and even helped us implement a comprehensive budget. The team really stepped up to take care of all aspects of our financial picture, including portfolio design, CH Financial introduced us to a lawyer who took care of everything for us, estate planning and tax, while helping us simplify our financial affairs.

Being of the sandwich generation my wife and I spend considerable time caring for our surviving parents and our grandkids, so

freeing up valuable time is essential to allow us to do the things we love to do. The team at CHF takes care of the details and today my wife and I enjoy a comfortable, stress-free financial situation.

Over the years as a client of CHF, both our portfolio and wealth has grown exponentially, more than we could have ever imagined. Now that we are both happily retired, having the CHF team in our corner helps us to sleep better at night knowing that our somewhat complex financial puzzle is being looked after by a team of people that really care, as opposed to being treated like a number by a big bank.

I would have no hesitation in recommending the CHF team to others looking for a superior financial home in Calgary and a safe place to invest your hard-earned money.

Ian C, Calgary

Comfortably retired thanks to CH Financial