Concentrated Stock Overlay


Objective: Income

The Concentrated Stock Overlay (CSO) strategy is a dynamic option strategy that seeks to help an investor increase the productivity of a concentrated equity position by generating a new income stream (option premium) from writing call options on the underlying equity position. As a tradeoff, the investor must be willing to forego potential upside appreciation (the opportunity risk).

Driven by the firm’s proprietary ROMS® information technology platform, the CSO strategy is based on two guiding principles:

  • A call writing strategy has the potential to generate additional cash returns (option premium) on an underlying stock.
  • Option positions are based on the number of shares in the underlying stock and the investor’s selected “Target Price”, which is the price level for a specific stock included in the CSO strategy above which the investor must be willing to forgo potential upside appreciation.


The Target Price, set by the investor, is a key concept in the CSO strategy. The Target Price, which determines the amount of income the investor can seek, drives the inputs to ROMS®.

To assist the client in setting a target price, Rampart estimates a series of potential Target Prices and the corresponding trade-off between potential yield from option sales and potential stock appreciation.

Once an investor chooses a Target Price for shares included in the CSO strategy, ROMS® is used to determine the initial number of call options to write and a strike price that is generally slightly above the current price of the stock. The maturity typically is 60 to 160 days to expiration. For subsequent trades, dynamic hedging takes over, meaning the CSO strategy responds to market advances and declines in a systematic and disciplined manner. For example, if the stock price advances sufficiently before expiration, Rampart will buy back outstanding options and then sell a larger number of new, higher strike price contracts as mathematically determined by ROMS®.

Potential Benefits:

  • The CSO strategy may help increase the productivity or utilization of an investor’s concentrated equity position(s).
  • Selling equity call options against the underlying position generates premium income in addition to any dividends received on that equity holding.
  • CSO offers clients the flexibility to set parameters that match their specific risk/reward investment objectives.

Important Risk Considerations

The CSO strategy is an option income strategy designed to continue for at least one year and therefore may not be suitable for clients with shorter investment horizons.

Clients participating in the CSO strategy will select and maintain a Target Price objective prior to initiating the strategy. The Target Price objective is an important factor, as clients will not participate in gains in the price of their stock above the price level where the position is 100% written.

The client is responsible for the selection and maintenance of the Target Price objective for the entire duration of the strategy.

Clients may have to liquidate (sell) some or all of their concentrated stock in certain circumstances.

If the stock price appreciates beyond the price where the stock is fully written, the cost to buy back the short call options will increase. Once this occurs, it may become difficult to obtain the desired yield objective chosen by the client.

If the CSO strategy is terminated early, a client may be required to pay a substantial amount of cash to close out option positions before they expire.

There is no assurance that income generated will exceed the cost to close out open option positions. The cost to close out open option positions may exceed the cash generated from the CSO strategy and result in a loss to the client.

The client’s stock may be the subject of an acquisition for cash. If the client’s stock is acquired as part of a cash takeover, it will no longer be possible to continue with the CSO strategy. Under these circumstances, the client will be required to close outstanding options at a cost that may exceed the cash generated by the CSO strategy.

Margin requirements for option writers are complicated and not the same for each type of underlying security. They are subject to change and can vary from brokerage firm to brokerage firm. As they have significant impact to the risk/reward profiles of each trade, writers of options (whether they be calls or puts alone or as part of multiple position strategies such as spreads, straddles, or strangles) should determine the applicable margin requirements from their brokerage firms and be sure that they are able to meet those requirements in case the market turns against them.

There is no assurance that Rampart Investment Management will be successful in implementing the CSO strategy (e.g., identifying or exploiting option pricing inefficiencies).