Understanding options: A guide to our enhanced yield strategy

Options are powerful financial instruments that can enhance investment yield when used strategically. This guide aims to demystify options and explain how they are integrated into our investment strategies to seek strong returns.

What are options?

An option is a derivative financial instrument which is based on the value of an underlying asset.  It is a contract between two parties which specifies a legal agreement to buy or sell an underlying asset at an agreed upon price by or on a specified date date. The contract is between the option writer (the seller of the option) and the option holder (the buyer of the option). The option holder has the right to exercise the option, while the option writer has the obligation to execute the contract.

There are two main types of options – call options and put options.

Definitions:

Call option	An agreement which gives the option holder the right, but not the obligation, to buy an underlying asset from the option writer at an agreed upon price by or on a specified date.
Put option	An agreement which gives the option holder the right, but not the obligation, to sell an underlying asset to the writer at an agreed upon price by or on a specified date.
Option holders	Buyers of options who have the right, but not the obligation, to buy or sell an underlying asset from or to the option writer. To secure this right, option holders pay a premium to the option writer.
Option writers	Sellers of options who have the obligation to buy or sell an underlying asset from or to the option holder. Option writers receive a premium from the option holder regardless.
Premium	The up-front amount paid for the contract which the seller receives from the buyer.
Strike price	The agreed upon or specified price written in the contract where the underlying asset may be bought or sold.
Expiration date	The date on which the contract expires.
Exercise	To exercise an option, the option holder utilizes their right, obtained through the payment of the premium, to buy or sell an underlying asset from or to the option writer at the strike price.
Moneyness	Indicates what outcome the holder can expect from exercising an option. There are three main terms:
In-the-money: tells a holder that they will yield a profit if the option is exercised.   At-the-money: tells a holder that the strike price equals the price of the underlying asset where exercising yields little to no profit. Out-of-the-money: tells a holder that exercising would generate a loss, and typically these are not exercised.

Using options to enhance yield

The Mackenzie Global Dividend Enhanced Yield and Enhanced Yield PLUS Funds will utilize a mixture of long equities, put options and call options to seek a high stable cash flow for investors, as well as capital appreciation. The funds will leverage the proven fundamental process of the Mackenzie Global Equity and Income Team, which manages the Mackenzie Global Dividend Fund.

Through their fundamental process, the team identifies high-quality businesses which pass the test for a place on their “dividend dream team” list. To facilitate their buy and sell discipline, the team will utilize put options to buy these securities at lower attractive prices, and call options to sell securities at what they determine to be fair value. When writing these options, the funds will collect premiums, regardless of the option outcome, which will help enhance the yield of the funds.

Below are hypothetical examples which may occur in the funds through the option writing strategy:

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The content of this document (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.