The challenge:

Client currently holds a highly-appreciated stock (a non-qualified position with a low cost basis). The concern now centers on reducing exposure to a single position for risk management, however a reluctance to just liquidate the position given the potential tax-consequences of high volume selling.

Potential ways to address concern:

In this instance we can use a covered call (options) strategy to generate additional income on the stock holding; this income can then used be used to both off-set the potential tax-consequences of the highly-appreciated liquidation (in this example LMT) or to transition to a direct indexing—purchasing holdings of a corresponding index that can then be monitored daily for tax-loss harvesting.

Further tax-loss harvesting can be done by buying back the covered call option at a loss and then subsequently liquidating a corresponding amount of highly-appreciated stock to offset the gains, and using that settled cash as a transition to direct indexing to continue reducing position until it is in-line with objectives.

Date: 10/2/2024
Portfolio Value: $544,473

Holdings and Call Option Details

Shares	Company	Symbol	Stock Price	Value	Div Yield	Expiration Date	Days to Expiration	Call Strike $	Call Strike %	Call Premium	Credit $	Credit %
400	LOCKHEED MARTIN	LMT	$604.97	$241,988	2.19%	11/15/24	44	$650.00	107.44%	$7.10	$2,840.00	1.17%
500	LOCKHEED MARTIN	LMT	$604.97	$302,485	2.19%	12/20/24	79	$670.00	110.75%	$6.90	$3,450.00	1.14%
900 Total	TOTALS	LMT	$604.97	$544,473	2.19%	Avg: 63.4	-	$661.11	109.28%	$6.99	$6,290.00	1.16%

Initial Premium Income from the Sale of Call Options:

$6,290.00 (1.16%)*

*Based on initial call option sale. Values are not annualized. The premium shown here is an estimate

Income Analysis Summary

Income Source	Annual Amount	Annual Yield
Estimated Annual Income from Dividends*	$11,940.29	2.19%
Annualized Premium Income from Call Options**	$39,498.96	7.25%
Total Income from Dividends and Call Option Premium	$51,439.26	9.45%
Possible Upside Participation for Underlying Stock^	$50,527.00	9.28%

Option Summary

# of Stocks	Maturity	Upside Participation	Settlement	Option Type
1	1 to 3 months	7.4% to 10.7%	American	Standard

Footnotes:

* Estimated Annual Income from Dividends is based on the stock's current dividend yield and assumes the dividend yield does not change.

** Annualized Premium Income from the Sale of Call Options is based on the initial premium received and average days to maturity and assumes no options are assigned, and option terms and prices on any additional sales of call options are the same as the information provided above. Option terms and prices will vary over time. There is no guarantee option terms and prices will be similar to those above and may be materially different.

^ Upside Participation from Initial Sale of Call Options assumes the underlying stock price appreciates to the original call option strike prices sold. Any additional upside participation depends on the price movement of the underlying stock and the terms and prices of subsequent call options.

Direct Indexing Portfolio

Portfolio Overview

✓ Each portfolio holds only a fraction of the securities found in the S&P 500
✓ Each portfolio is optimized to select a subset that aligns with each client's investment goals
✓ Securities are selected and weighted to align risk exposure with the index while omitting the client's concentrated position
✓ Positions are evaluated daily for tax-loss harvesting
✓ Upon each rebalance, losses are sold, and complimentary securities are bought to maintain diversification and exposure to the S&P 500
✓ After 31 days, previously sold securities are eligible to be purchased as replacements for newly sold securities

Portfolio Metrics Comparison

Metric	Direct Indexing Portfolio	S&P 500
Number of Holdings	145	503
Tracking Error	0.85	-
R-Squared	0.99	1
Beta	1.03	1
Projected Risk (SD)	22.74	22.75

Top 10 Holdings

% of $250k Sample Direct Indexing as of 9/10/24

Ticker	Company Name	Weight
AAPL	Apple Inc	6.80%
MSFT	Microsoft Corp	6.17%
NVDA	NVIDIA Corp	5.83%
AMZN	Amazon.com Inc	3.37%
META	Meta Platforms Inc - Class A	2.62%
GOOGL	Alphabet Inc - CL A	1.90%
GOOG	Alphabet Inc - CL C	1.67%
BRK/B	Berkshire Hathaway Inc - CL B	1.65%
BKNG	Booking Holdings Inc	1.52%
LLY	Eli Lilly & Co	1.45%

Sector Allocation

Information Technology

~30%

Consumer Discretionary

~12%

Industrials

~10%

Communication Services

~9%

Real Estate

~4%

Energy

~3%

Important Disclaimer: The optimizer utilizes Northfield Information Services to run the transition analysis. The analysis is intended to illustrate the potential impact of transitioning the current account portfolio into a direct indexing strategy to track the chosen benchmark(s) above based on the predicted tracking error. No representations and warranties are made as to the reasonableness of the assumptions. This information is provided for illustration purposes only. Performance results do not reflect the impact of material market or economic events, taxes, management fees, expenses, trading costs or other costs. Results do not represent actual trading. Actual investment results will vary and could be materially different. Values calculated from 9/10/2023 to 9/10/2024.

The result:

Client is able to significantly reduce equity exposure and concentrated risk at potentially little to no tax-consequence.

Services