Ep 3 - Jeff Chang - How can investors exploit volatility to manage risk and generate income? - ROI Podcast

In this episode of the First Trust ROI Podcast, Ryan talks with Jeff Chang, President of CBOE Vest, about two areas of the ETF industry that have seen robust growth over the past few years:  Buffered ETFs and Call-writing ETFs.

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Chapters

• 0:00 Introduction and Market Overview
• 1:07 Guest Introduction: Jeff Chang
• 2:13 The Coffee Name Story
• 3:40 Challenges of the Current Market Environment
• 4:20 Derivatives and Options Strategies: Addressing Misconceptions
• 5:57 Growth of Buffered ETFs and How They Work
• 8:16 Understanding Volatility and Upside Caps
• 9:54 Rolling Over Options in ETFs: Benefits and Tax Efficiency
• 12:02 Calculating Outcomes for Different Entry Points
• 13:34 Addressing Uncompensated Credit Risk in Options-Based Strategies
• 15:56 Call-Writing ETFs and Generating Income in Volatile Markets
• 17:19 Target Income Strategy: How It Works
• 18:48 Key Considerations When Evaluating Covered Call Strategies
• 20:12 Advantages of Writing Weekly Calls for Higher Premiums
• 21:57 Combining Individual Stock Calls with Weekly Writing
• 24:55 Use Cases for Call-Writing and Buffered Strategies
• 26:17 Final Thoughts and Conclusion

Transcript

00:00:00:00 - 00:00:44:02

Ryan

Welcome to this episode of the First Trust ROI Podcast. My name is Ryan Issakainen, an ETF strategist here at First Trust. This has been a really unusual market environment as we came into this year. Nobody, and I mean nobody, had forecast that the stock market would perform the way that it has. You know, people have, I think, sat out in many cases from participation in the market because of some expectations that we would see a recession and earnings drop.

00:00:44:04-00:01:06:19

Ryan

And our view is that that is probably still going to happen. But at the same time, investors need to have exposure to stocks in order to reach their goals and objectives. And that is a conundrum. How do you participate in markets while recognizing there is a strong potential for a recession, which is often accompanied by a downdraft in stock prices?

00:01:07:01-00:01:30:21

Ryan

And that's why I am really looking forward to today's conversation. Joining me today on the podcast is Jeff Chang. He is president of Kebo Vest. Jeff co-founded that firm about a decade ago, and Cibo VATS has been a great partner of First Trust. There is a subadvisor for a number of our funds and our teams. And they really have come up with a solution.

00:01:30:23-00:01:52:18

Ryan

Essentially, they provide a downside buffer against negative returns for the market while allowing participation on the upside. We'll dig into that. And so I look forward to the conversation with Jeff today. Thanks for joining us, and please enjoy. Jeff Chang. Welcome to the First Trust ROI podcast.

00:01:52:20-00:01:54:14

Jeff

Brian Thanks for having me.

00:01:54:16-00:02:13:02

Ryan

You and I grabbed coffee before we started, and you were explaining to me the concept of a coffee name. So as we get started here, can you explain it for the viewers of the ROI podcast? Is this value added to the idea of a coffee name when you go into the coffee shop?

00:02:13:04-00:02:28:02

Jeff

Yeah. So, like when you go to a coffee shop and you say Jeffrey or Ryan, they end up yelling Ryan, Brian, Jeff, or John. So it's, you know, good to pick a coffee name that no one's going to mess up. So mine is Megatron. I've been trying to get you to me.

00:02:28:06-00:02:29:13

Ryan

Yeah, obviously your name is.

00:02:29:13-00:02:40:06

Jeff

Megatron yet, and they're not going to mistake that for anybody else. And it's also entertaining just to see Megatron yell in the coffee shop. Everybody looks to see who that is.

00:02:40:08-00:03:07:20

Ryan

That is the type of innovation that we're looking for. So, Jeff, I've known you for a while now. You are the president of Cibo Vest. You co-founded Cibo Vest about a decade ago. Yep. You're with your co-founder, Karen. And you guys have been churning out all sorts of really innovative solutions for investment professionals and investors looking at the landscape of where we are today.

00:03:07:22-00:03:17:07

Ryan

What would you say is the number one issue, the number one problem, and the number one question that investment professionals are faced with today?

00:03:17:09-00:03:50:10

Jeff

In the market today. And as you look at it, I think many of us have never faced a market with inflation, right? Or manage money in an inflationary environment. It poses unique challenges, especially in, you know, the rally that we've seen recently, where it's really concentrated in a few select stocks. And so that then you start to look at as interest rates start to go up and the kind of foundation of asset allocation and kind of risk management have always been, you know, diversify as well as hope.

00:03:50:10-00:04:15:01

Jeff

I hope that, you know, when my stocks go down, my bonds go up. So a lot of times investors today are looking for alternative ways to provide risk management outside of, let's just say, diversification and asset allocation, as well as different ways they can generate income that is alternative to, let's just say, fixed income. So getting creative in this kind of inflationary environment, I think, is critical.

00:04:15:01-00:04:20:15

Jeff

As far as portfolio construction, especially where you know where the market is set up today,

00:04:20:17-00:04:46:06

Ryan

Now, your firm specializes in products that are related to mainly derivatives write options, and there's different ways to structure those two to seek different outcomes or to use your level of income. And I want to talk about some of those. But before I do, you know, I think there's this perception that some of the public has that options are just this risky thing that makes some people nervous.

00:04:46:06-00:04:49:01

Ryan

So why should they not think that way?

00:04:49:03-00:05:13:09

Jeff

Yeah, So, you know, options are just the building blocks, right? And, you know, some of the biggest reasons why people don't trade options themselves Actually, it comes down to even in the advisor community compliance. Right. There's a huge compliance hurdle that can come with option trading as well. Scalability. Right. Options expire. You have to keep trading it, and you start to have 300 clients.

00:05:13:09-00:05:34:18

Jeff

That's a lot of work to actually get done. So what we specialize in is actually just using those building blocks to actually create solutions, right? We utilize those options to create these types of solutions, whether it be in ETFs, Unity's, or any other wrapper. So that way, we're not selling the ingredients; we're actually creating the entire cake.

00:05:34:19-00:05:57:06

Ryan

Let's jump into some of these solutions. And I think it's been really amazing to see some of the growth that buffered products in particular have had, especially, you know, the timing, which has been pretty outstanding. It was pretty remarkable right before COVID hit. And, you know, the world shut down and risk markets sold off.

00:05:57:07-00:06:16:13

Ryan

First Trust launched our first series of buffer ETFs that were subadvised by Sebo Best. And so maybe take a minute or two and tell me or tell our listeners what a buffer ETF aims to do? Why? Why have these become so popular? What are they doing?

00:06:16:15-00:06:46:21

Jeff

Buffer strategies have been around for over 30 years. Some people have seen them in structure notes, annuities, or just trading the options themselves, creating a hedge, which in this case would be, let's say, like a put spread collar. So the strategy itself has not been new. What is the introduction of having it in different wrappers? Now you might use ETFs as well, which allows you to access that type of strategy in, like I said, perhaps a more liquid form.

00:06:46:23-00:07:07:19

Jeff

And so, for instance, a buffer ETF or the buffer strategy itself gives you downside protection—let's say, the first 10% for one year. So if S&P is down ten, you would be down zero before fees and expenses, but then you get upside participation up to a cap. But the great thing about a put option on S&P is that it's very similar to that.

00:07:07:20-00:07:18:22

Jeff

The negative correlation is perfect in the sense that for every dollar or passive strike price that put option would be paying you guaranteed by the clearing of the exchange.

00:07:19:00-00:07:21:09

Ryan

What gives you the upside participation?

00:07:21:11-00:07:39:01

Jeff

So the upside participation we actually buy, let's say for a particular strategy, will buy a call option basically really close to zero to get exposure to the underlying So as an example, if we were getting exposure to S&P, we may buy a really low strike call on S&P.

00:07:39:06-00:07:46:06

Ryan

Okay. So based on market conditions, that's why the upside cap will vary with those sorts of products, right?

00:07:46:10-00:08:01:17

Jeff

This type of structure So as volatility is higher, the stock can be sold higher. The reason why is that as volatility goes up, the call option will generate a higher premium. And so the potential to sell at a higher price comes into play. So that's why a higher vol creates a higher

00:08:01:19-00:08:16:04

Ryan

So that's a really important point as we're thinking about these types of strategies in an environment with increased volatility and a lot of risk that actually ends up with a higher cap. Is that what you're telling us?

00:08:16:06-00:08:35:00

Jeff

That's right. That's right. So, if we're talking about a one-year strategy, as the one-year volatility goes up, that call premium will increase. And so, thereby, the cap would be higher. Now what also makes call premiums higher is also interest rates. So if the one-year interest rate were to go up, that premium, that call premium, is also going to increase.

00:08:35:00-00:08:37:18

Jeff

That also raises the strike price and cap.

00:08:37:18-00:09:00:05

Ryan

Structure in a unit structure in first trust. We have various types of structures that we work with. Sebo Investors is the subadvisor for managing these products, but in the unit structure, there is a beginning, there's a maturity, and the terms are set at the beginning, and they're based on the contractual value of those options. In the ETF, that's not the case.

00:09:00:05-00:09:07:07

Ryan

So how does the ETF then work? You've reached the end of your one-year period from the time it started. What happens next?

00:09:07:08-00:09:32:10

Jeff

If it's a one-year option, and let's say it's expiring on the third Friday inside an ETF, those options will expire, and then we'll buy a new set of options on that same day. Now the investor holds the ETF. They don't want to see the NAV movement in the terms. So given that you know, if you have a 10% buffer upside cap, let's say you've hit your cap and is 15, you should get that 15%.

00:09:32:16-00:09:59:11

Jeff

If you look from now, from the beginning of the third Friday, one year ago, to the third Friday of expiration, that nav to NAV would basically reflect the terms of the buffer ETF. Now, the investor, just like the ETF rebalance, doesn't notice anything. The ETF continues to run, and this has many benefits. First off, it solves the issue of scalability; the investor actually doesn't have to trade the new options.

00:09:59:11-00:10:18:13

Jeff

Right, so if you have 200 clients with strange declines, the buffer ETF is automatically rolling for you. The second component is the potential for tax efficiency, right? As long as the ETF doesn't make a distribution, then those gains can roll. Whereas if they were holding the actual options in their, let's say, brokerage account every time that option expires

00:10:18:13-00:10:38:01

Jeff

And if they were for a gain, obviously, you know, Uncle Sam's going to take his pound of flesh out of that trade. But by combining ETF technology with option technology, there's the potential for tax efficiency, and the first receivables buffer ETFs are the only lineup of equity buffer ETFs that have never distributed a capital gain yet.

00:10:38:02-00:11:02:14

Ryan

So we've been talking mainly about someone who, if they say purchase in the rebalance state, knows what their outcome is likely to be based on the value of those options. What if they buy it, you know, five days later? How can they understand what the terms are at a different point in time than the rebalance date or the date that the initial terms are set?

00:11:02:16-00:11:21:14

Jeff

What's great about options is their expiration. It's a math problem, right? Wherever S&P is going to end, if it's above its cap, below its cap, in the buffer, or below the buffer, it's a mathematical calculation that the options will calculate what they will pay. Now, when the investor gets in, they're going to pay a particular price for that option.

00:11:21:16-00:11:44:02

Jeff

And if you calculate, okay, I paid a specific price for these options today, then it's a math problem. Hey, let's say, you know, a little less than one year from now. What is that going to actually cost? What are these options actually going to cost? Now, what's critical here is that, at first trust, we have great tools on the website that you can actually see, let's say, for a particular strategy.

00:11:44:02-00:12:02:08

Jeff

If I were to get it in, let's say five days after the roll and I pay this price, and then on the third Friday, let's say on in, let's say a little less than a year, I can actually see, Hey, if S&P is up ten, down ten, or 20% or down 20%, what is that strategy going to actually pay?

00:12:02:10-00:12:21:12

Ryan

So that is updated throughout the day on the first trust website. So that's something important. And something else you just said is another point that I was going to want to highlight, and that is the fact that because the value of the ETF derives from the value of those underlying options, you know what it's worth throughout the trading day.

00:12:21:12-00:12:24:04

Ryan

And so these trade like any other ETF, correct?

00:12:24:06-00:12:43:21

Jeff

That's right. So you get the intraday ability to actually see how the options are trading. Secondly, the tool itself is actually intraday. You can also see that I think there's a 15-minute delay. So even throughout the day, you can see, hey, if I were to enter into this strategy, what that could potentially give you.

00:12:43:23-00:12:55:04

Ryan

You're actually not exposed to that additional uncompensated credit risk because this is not a bank-issued note, right?

00:12:55:06-00:13:12:22

Jeff

That's correct. So each of these strategies holds exchange-traded options, and the counterparty to those exchange-traded options is the clearing of the exchange, which is OTC. So every exchange-traded option faces the option clearing corp, which is the clearing of the option exchanges.

00:13:13:00-00:13:34:08

Ryan

So hopefully, that demystifies the product. I know we delved into the weeds a little bit, but I think that's really important for this type of investment product because it is a little bit more complicated until you kind of break it down, and then it's much clearer. But this has been far and away one of the fastest areas of growth in the ETF industry.

00:13:34:10-00:13:48:11

Ryan

As you talk to investment professionals, and they're, you know, some of their clients, what's the typical use case? I think you mentioned it at the outset. How are people using these in an investor's portfolio?

00:13:48:13-00:14:12:04

Jeff

Like I mentioned earlier, by diversifying your risk management and introducing hedging, it kind of reduces that reliance on a stable negative correlation between stocks and bonds. So that's one use case where, if you look at, for example, a 10% buffer on S&P as a very similar standard deviation to what's in a 6040 portfolio over the long term,

00:14:12:06-00:14:37:11

Jeff

So if I were to introduce that, let's say, into a 6040 portfolio, let's say if I take $10 out, right, six from equity, four from fixed income, I put it in a 10% buffer strategy. The volatility could be very similar. But what we've done is change the risk management from just asset allocation and introduce hedging, which kind of reduces, like I said, that reliance on the negative correlation between stocks and bonds.

00:14:37:13-00:14:42:06

Ryan

So essentially, what you're doing is diversifying the way that you're managing risk. Is that.

00:14:42:06-00:14:57:23

Jeff

Right? That's right. And the second component is also where investors want to reduce their risk. They want to reduce their bets. Maybe they're looking at, Hey, this rally is only in a couple of stocks. They're not sure whether they missed the boat.

00:14:58:04-00:15:20:07

Ryan

This is a really unusual market environment where we seem to be on the edge of a recession. You know, first-trust economics has been calling for a recession sometime later this year or early next year, possibly. That's usually accompanied by a drop in earnings. You know, earnings multiples can drop, but at the same time, stocks keep pushing higher.

00:15:20:09-00:15:29:15

Ryan

And I think a lot of investors want to have exposure to markets, but they also want some level of protection on the downside. And this is the sort of environment where they really thrive.

00:15:29:18-00:15:49:08

Jeff

Yeah, that's right. And because of that kind of setup, you sometimes also get clients who want to go to cash. Right. And that can be extremely difficult if you look over the long term, you know, you don't know. So this allows them to feel a little bit more comfortable anywhere. You know, if they are super conservative.

00:15:49:08-00:15:56:20

Jeff

We have strategies with, let's say, a 30% buffer. It allows them to get off the sidelines and still participate.

00:15:56:22-00:16:25:17

Ryan

So again, these buffer ETFs have about $31 billion in assets, roughly today. Another area that Sebo best subadvisors and some first trust in ETFs is what we call our target income funds. This is another area of these call-writing ETFs. We've seen something like $17 billion of net inflows or assets under management today in that particular category of ETFs. And what's remarkable about that is that most of it's come over the last few years.

00:16:25:19-00:16:33:17

Ryan

So, you know, what's different about those target income products? They're also using options, but how do they work?

00:16:33:19-00:16:54:10

Jeff

So we've seen, like you said, a huge growth in kinds of covered call writing strategies and funds, which I think is largely driven by, you know, higher volatility. Like I said, that generates call premiums. Also, interest rates have gone up. That also makes the strategy more attractive. So some of the things that most asset classes dislike about cover call strategies actually tend to benefit them.

00:16:54:10-00:17:19:02

Jeff

Now our target income strategy actually works backwards. So what makes that unique is that,  in most cases, clients have potential cash flow needs, and that cash flow doesn't vary in the sense that, if I were to sell a call that involves high income, I may generate a higher income level as well. I generate less income, but they want that stable level of cash flow.

00:17:19:04-00:17:42:06

Jeff

So target income really addresses that because we start with a level of income and then we write calls to meet that target. So that's what really makes target income more unique than what you see out there in the marketplace today, where the income level can vary. Right? And so, as an example, if I were to target 8% over S&P yield, if S&P is yielding, let's say 1%, I would add eight to that.

00:17:42:07-00:18:09:10

Jeff

Let's say my target is nine. I'm just going to write just enough cover calls to get to that 9% yield now. I think there are three things that people should be very aware of. The first one is that the biggest driver of return and cover call funds is actually stock selection. So whenever you look at a cover call strategy, the first aspect that should be evaluated is the underlying stock quality.

00:18:09:10-00:18:11:22

Jeff

Are they going to perform over the long term?

00:18:11:22-00:18:23:22

Ryan

There are numerous covered call ETFs available. So just like you're evaluating other equity ETFs, that's step one of looking at, you know, what are they actually investing? Okay, now what's next?

00:18:24:02-00:18:43:00

Jeff

So the second is that there are certain pitfalls in covered call writing. We noticed that one of the biggest pitfalls in covered call writing is covering the entire portfolio. The reason why, and that is really the Achilles heel, is because when the market comes down and comes back up, you're completely covered if you cover the entire portfolio.

00:18:43:00-00:19:13:02

Jeff

So we saw this in only So after the crisis market came down, there's, you know, a lot of closed-end funds that had covered call strategies, and they got capped out. So when the 2009 recovery occurred, they massively underperformed the market. We saw that again in March of 2020, during COVID strategies that cover the entire portfolio, the market underperformed significantly because, as we know, come April or May, the market really kind of rallied back, but they weren't participating in that upside.

00:19:13:02-00:19:37:08

Jeff

So that's why the second thing is, if you're looking at a covered call strategy covering the entire portfolio, you have to be aware that there's that Achilles heel there. And then the last is to make sure that you have an edge. The markets are efficient. We like to think that when we write cover calls, there's something there that allows us to capture a little bit of extra.

00:19:37:08-00:20:04:06

Jeff

Now, this is where the target income comes in. Like I said, we vary the amount of options that we write to generate that income, and instead of capping the entire portfolio, we may, let's say, right at the money calls on, let's say, 20% of the portfolio. So you get 80% of the upside plus that yield. So as an example, if I had a strategy and covered 20% of the portfolio, if the market goes up 10%, I'm just paying for 80% of that upside.

00:20:04:06-00:20:32:02

Jeff

So let's say if it's up to ten, I get eight. And then in my target income, let's say I have a nine yield, then there's potential for, let's say, a 17% return, whereas if I covered the entire portfolio, I would just get that yield. I wouldn't participate in that upside. Now, the edge is where we see a lot of innovation, and what we're really proud of is that there are several different ways that you can write calls to kind of get a little bit more edge.

00:20:32:02-00:20:50:21

Jeff

So a lot of times we will write on an index. An index is fully diversified, and if it's diversified, it tends to have less volatility. Now, if I take the exact same index and write on each individual name, though each individual stock is not diversified, it has more volatility and has the potential to generate more premium.

00:20:50:23-00:20:57:05

Jeff

Now, the downside of that is that if I have an index of, let's say, 50 stocks, I can write calls on each of those 50.

00:20:57:07-00:21:22:06

Ryan

So hold on. I want to draw that point out because I think that's a really important point that people would understand intuitively. But I just want to make sure we don't gloss over it. So what you're saying is that you can get a higher premium by owning the individual options or writing the individual options as opposed to the whole thing, because in the whole thing, you've got the variance between the stocks that helps diversify your risk.

00:21:22:06-00:21:33:02

Ryan

And so you don't get as much volatility, and you don't get as many call premiums. So by doing this, an individual named as one of the edges could potentially get a premium, is that right?

00:21:33:04-00:21:39:23

Jeff

That's right. And so on the downside, though, it's a lot of work. Right? Right.

00:21:39:23-00:21:42:04

Ryan

If you say yes,

00:21:42:06-00:22:03:20

Jeff

And that's why, if you had like 50 stocks and, let's say, 300 clients, you're talking about hundreds of thousands of trades that you'd have to make a year. But now we are able to provide that in the ETF, or, you know, an ETF or any other wrapper. So what you end up getting is that income, perhaps not giving up as much upside.

00:22:03:22-00:22:12:06

Jeff

Now, the other edge that we've seen that is out there that we've seen in the institutional space is writing weekly.

00:22:12:06-00:22:16:03

Ryan

So write weekly calls instead of monthly calls.

00:22:16:05-00:22:17:08

Jeff

That's right. That's right.

00:22:17:13-00:22:19:03

Ryan

And what's the advantage of that?

00:22:19:05-00:22:26:00

Jeff

If you look at a monthly call option, So when you sell costs and you want the premium to go to zero, Because you don't want.

00:22:26:00-00:22:26:16

Ryan

It is to expire.

00:22:26:16-00:22:48:15

Jeff

Exactly. Exactly. And if you notice that decay, the drop in premium is the biggest in the last seven days. Right. In fact, it starts to accelerate. And so it's the idea that, as it approaches expiration, the option will be worthless after expiration. So that acceleration always occurs. Is this similar to, like, football tickets? Game times are at 1:00.

00:22:48:17-00:22:52:00

Jeff

Right. If you notice, if you look on StubHub at 12:00, tickets start to drop.

00:22:52:00-00:22:54:09

Ryan

This time, I will be looking for your StubHub tick.

00:22:54:10-00:23:14:05

Jeff

Exactly. Exactly. Because you see the same impact of the drop in price. The only thing that doesn't do that are Taylor Swift tickets. But options and regular tickets typically have that accelerated decay. And if you write options four times a month, there is a potential to actually generate more premium than you would have in a monthly option.

00:23:14:05-00:23:30:20

Ryan

So how does that compare if, over the course of a month, you write four successive weekly calls as opposed to a month? What's I mean, can you compare the two quantitatively, like, what's the what would you expect?

00:23:31:00-00:23:38:03

Jeff

There's a lot of variables to it, right? Between monthlies and weeklies if you compare them. But if you do it four times a month, you know, there is potential.

00:23:38:05-00:23:39:22

Ryan

So it's a significant amount.

00:23:40:03-00:23:42:19

Jeff

It's a significant amount. Yeah, that's right. That's right.

00:23:42:21-00:23:51:12

Ryan

As individuals, we're trying to access that sort of strategy. The problem is that they have to make all those calls. It's a lot of work.

00:23:51:14-00:24:11:22

Jeff

Yeah, because there's 52 weeks out of the year. You have to trade those. And if you start to have, you know, 100 or 200 clients, you have to write options every week, which becomes very, very challenging. And so even more exciting is if you combine the two and actually write single stock weeklies. Now you have the edge in both cases, right?

00:24:11:22–00:24:16:03

Jeff

You've got the individual names, plus you're writing them weekly.

00:24:16:05-00:24:35:03

Ryan

And so with different types of ETFs, you can execute different types of strategies. And what you're saying is that you're looking for a specific basket of stocks that's in an ETF. You're looking for the most edge that you can. Then you can access that, right?

00:24:35:05-00:24:55:16

Jeff

That's right. So just accessing those benefits so that way you can retain the upside because the other component of that of, let's say, the target income strategy is, as you notice, as volatility goes up, it generates more call premium. Well, in a target income strategy, it doesn't mean that you're going to get more yield. It actually means that you're writing fewer calls, so you're getting more upside participation.

00:24:55:18-00:25:18:02

Jeff

But what's interesting about that, though, is that if you look historically at that, when volatility goes up, that means the March stock market is going down. Right. And that means that when volume goes up, we write fewer calls. And when the market snaps back, you're actually in a position where vol is elevated to participate more because you saw fewer calls.

00:25:18:03-00:25:33:07

Jeff

But when the market starts back, there's almost an accordion effect on target income where you sell fewer calls when the market actually goes down. So that way, when it comes back, you get that potential for more upside participation than a normal, let's say, just like covering the entire portfolio types, right?

00:25:33:10-00:25:59:00

Ryan

So what you're saying is that there's a variable amount of participation, and that changes based on volatility because that accounts for the call premiums that you're receiving, and you have to write fewer calls in a more volatile environment. So in the instance you're talking about, like we saw in the big swoon during COVID, where things really sold off, you wanted to have the ability to participate on the way back.

00:25:59:00-00:25:59:08

Jeff

That's right.

00:25:59:11-00:26:16:20

Ryan

So what's the use case that people are thinking about? You know, how do I put something like this into a portfolio? Where does it fit? Is it true that this sort of product replaces a part of their fixed income, part of their equity, and part of their alternatives? Where do you see it most often?

00:26:17:02-00:26:34:12

Jeff

The great thing is, like I said, that the first thing about looking at a covered call strategy is picking good stocks, right? So this really can sit inside an equity core as a way to generate income off the equity portion of the portfolio, because in most cases, fixed income serves two purposes, right? A ballast and a source of income.

00:26:34:14-00:26:56:15

Jeff

Now, from a risk management perspective, buffer strategies can really help to provide additional balance. But where does that income come from once you've implemented those buffer strategies? So you can actually generate that income from that equity core using target income. So the two strategies really kind of marry themselves very well because they are also creating a balance and a source of income.

00:26:56:15-00:27:18:04

Ryan

All right. Well, Jeff Chang, the options guru for target income, target outcome, and a variety of other strategies that your firm has helped to develop, And you've done a fantastic job of advising several First Trust funds. So on behalf of First Trust, I want to thank you for that, first of all, but also thank you for joining the Arrow Podcast.

00:27:18:06-00:27:22:03

Ryan

Thanks to all those who have joined us as well. We will see you next time.

00:27:22:05-00:27:52:21

Jeff

Thank you. Ryan.