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.
Addressing the 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.
Portfolio Value: $544,473
Holdings and Call Option Details
| Shares | Company | Symbol | Stock Price | Value | Div Yield | Expiration Date | Days to Exp | 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 | 1.17% |
| 500 | LOCKHEED MARTIN | LMT | $604.97 | $302,485 | 2.19% | 12/20/24 | 79 | $670.00 | 110.75% | $6.90 | $3,450 | 1.14% |
| 900 Total | TOTALS | LMT | $604.97 | $544,473 | 2.19% | Avg: 63.4 | — | $661.11 | 109.28% | $6.99 | $6,290 | 1.16% |
Initial Premium Income from the Sale of Call Options
$6,290.00 (1.16%)*
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
The result:
Client is able to significantly reduce equity exposure and concentrated risk at potentially little to no tax-consequence.
