Barry Martin, CFA, Lead Portfolio Manager for Options Overlay Strategies at Shelton Capital Management, joined Keith Black, Managing Director of RIA Channel, to discuss active covered call strategies.
Overview
The Shelton Option Overlay Strategy is a separately managed account designed for investors who hold one or more concentrated stock positions and are comfortable establishing a defined target selling price on those holdings.
The strategy uses a covered call overlay to evaluate and manage option positions in light of the client’s risk/return objectives and the characteristics of the underlying stock. For advisors supporting clients with appreciated or legacy concentrated holdings, the strategy may offer a more structured framework than passive ownership.
Strategy Objective
The strategy seeks to enhance the return profile of a concentrated stock position by generating option premium income. Targeted returns above the stand-alone performance of the stock range from 2–6% annually, depending on the underlying stock’s characteristics and the client’s risk tolerance.
Where The Strategy Can Fit
The strategy may be relevant for advisors whose clients hold one or more concentrated stock positions and would benefit from a more structured way to manage those holdings. It may be appropriate for clients seeking:
- Current cash flow from a concentrated stock position through covered call premiums.
- A more deliberate approach to concentration management.
- A defined target selling price rather than an immediate exit.
- A gradual, strategic transition from a concentrated holding into a more diversified portfolio.
- Better integration of concentrated legacy or appreciated stock holdings into broader wealth planning conversations.
How The Strategy Works
The Shelton Option Overlay Strategy is built around the idea that concentrated stock holdings can often be managed more intentionally when a client has long-term growth expectations and an interest in generating current cash flow.
Rather than treating a concentrated position as static, the strategy applies an option overlay to help evaluate ways the holding could be made more productive within the client’s broader asset allocation and planning picture. The approach is designed to support more deliberate conversations around concentration, target sale levels, and staged diversification.
How Shelton selects and monitors option positions
The team begins by assessing the characteristics of the concentrated stock, including volatility, dividend yield, option liquidity, and current market conditions.
Working with the advisor and the client, the team identifies the client’s planned target price and desired risk/reward tradeoff that will guide covered call implementation.
The team continuously evaluates existing positions relative to those parameters, identifying call writing opportunities that may offer the most favorable combination of premium income and alignment with the client’s goals under current market conditions.
The strategy is monitored and managed on an ongoing basis, with adjustments made as market conditions, option availability, and client circumstances evolve.
Concentrated Stock Checklist for Advisors
Managing a concentrated stock position starts with a plan. Use this quick checklist to start assessing your client’s current situation.
Identify Exposure
Review your client’s total single stock exposure.
Cost Basis & Liabilities
Understand your client’s cost basis and potential tax liability.
Strategize Timing
Evaluate your client’s best time to sell, hold, or gift shares.
Tax Strategies
Explore tax-deferral or charitable giving strategies.
Align With Financial Goals
Make sure your client’s concentrated stock decisions support broader financial goals, risk tolerance, and long-term planning.
Why Investors Consider An Option Overlay SMA
- Designed specifically for large concentrated single-stock positions.
- Built around a client-defined target selling price and risk/return objectives.
- Uses a covered call overlay approach.
- Seeks potential current cash flow through option premium on existing holdings.
- May support a gradual, planned reduction in stock concentration over time.
- Includes ongoing monitoring of option positions and stock characteristics.
- Keeps concentrated holdings visible within the advisor’s broader planning relationship.
Management Team
Barry Martin, CFA
Nick Griebenow, CFA
Jason Goldenberg
Jake Gallion
Common Questions
The Shelton Option Overlay Strategy is a separately managed account designed for investors who hold one or more concentrated stock positions and are comfortable establishing a defined target selling price on those holdings.
The strategy seeks to generate cash flow by writing covered calls on concentrated stock positions. Option premiums may enhance the return profile of the holding, depending on the stock’s characteristics, option availability, and market conditions.
The ability to exit the strategy is always available but may have a negative financial consequence. If the client chooses to exit the strategy, Shelton would need to repurchase the outstanding calls, and this cost will vary depending upon multiple factors.
If early assignment occurs, the client is obligated to surrender the covered shares at the option’s strike price, which means some or all of the position may be sold earlier than anticipated. This can affect the client’s participation in any further upside in the stock and, for taxable investors, may create a taxable event ahead of the planned timeline.
No. The projected return range of 2–6% annually is an estimate only. It is based on the characteristics of the underlying stock and current market conditions. There is no guarantee that any cash flow target will be met. Similarly, there is no guarantee that price targets will be achieved under prevailing market conditions.
Contact Us for More Information
We have a team of professionals dedicated to supporting the needs of our advisor clients.
Important Considerations
The strategy does not eliminate downside risk associated with the underlying stock position.
The use of covered calls may limit gains if the stock rises above the strike price.
Projected annual cash flows and target prices are estimates only and are not guaranteed.
Early assignment may result in some or all covered shares being sold before the expected expiration date of the option.
The sale of stock and each option transaction may produce tax consequences for taxable investors. Shelton Capital Management does not provide tax advice. Investors should discuss their specific situation with a qualified tax advisor.
All investments involve risk, including possible loss of principal. There can be no assurance the strategy will achieve its objective.
INVESTMENTS ARE NOT FDIC INSURED OR BANK GUARANTEED AND MAY LOSE VALUE.
