Options Investing for Income, Liquidity and Volatility

Anu: There's been no shortage of things for markets to worry about this year. Military action in the Middle East, oil price swings, tariffs, an AI build-out absorbing enormous amounts of capital, and an index increasingly concentrated in a handful of technology names. We can add US midterm elections in November to that list—a risk event with a date attached to it. And yet, volatility has been comparatively contained. But what really moves volatility, and what markets have learned to absorb, may be less obvious than the headlines suggest.

Options markets are where that volatility gets priced, and increasingly, they're being put to work in new and different ways. Alongside the familiar uses like generating income or managing a concentrated stock position, options overlays are increasingly being used by a broader group of investors looking to borrow against a portfolio. Until recently, that kind of financing was largely limited to institutions and private bank clients. My name is Anu Rajakumar, and today we're taking a deep dive into options markets with Derek Devens, senior portfolio manager in Neuberger's Options Group. Derek, welcome back to the show.

Derek: Thank you for having me.

Anu: Derek, as I mentioned in the introduction, 2026 has thrown a lot at markets, but despite everything, volatility has been fairly contained this year. As I said before, that's exactly where your team lives. Options markets are where all of this gets priced. So, tell me, what's driving the volatility picture in 2026?

Derek: It's a great question. Volatility has evolved a lot over the years. What I mean by that is, we live in the age of information, and everything you've listed is an event, it's something to worry about, but there's really two things that cause those big moves or really, I think, spook markets. One is the scale. I think the markets haven't seen-- you talk about the conflicts, Iran or the Ukraine, they're not really of the scale, or the market's not buying any kind of story that it's going to spread significantly. So unless something now carries the scale to affect the entire globe or some of the larger economies, they get priced in pretty quickly.

Then the second one is, really, the duration or the time. And that's where I put tariffs or AI into perspective. Last year, tariffs and the idea that you might have this massive repricing or these trade wars, that was long-tailed enough to really get the markets concerned. Fast forward to today, and AI has got this potential to reprice entire markets or shake up entire businesses, but with that, there's huge capital investment, there's good things going on, it's viewed productively.

The tension really is the market and the information age has really evolved to where you're going to need something bigger. The S&P is a global index. These are global industries. To affect and move the needle, it has to be a large unknown, no longer just a quick unexpected Fed cut or somebody saying something outrageous in the news—that doesn't really spook the markets like it would have years ago.

Anu: I think it's a good reframing. Two things that move markets, the scale and the duration that those things may last. You've said in the past that volatility today is fundamentally an inflation story. How are inflation expectations being set differently than in a previous cycle?

Derek: Yes. This one's a little bit more nuanced. I think inflation is in the news, and with the Fed raising rates for the first time in a long time, you're really in a story of-- Wealth is so concentrated around the world. For better parts of two decades, we almost have–my generation, growing up through a long period of not having interest rates or not having income–so you led a lot of the industry to search for new ways to generate income, new ways to monetize volatility, get premiums, get cash flows. Now that rates are back, I don't know that the first step in raising rates and having real rates is going to be as maybe inflation-fighting as people think because that's a lot of cash flow.

People have been seeking cash for a long time. They've been seeking income. Now money markets and everything come to life. With concentrated wealth, that's going to promote a lot of spending at the higher, upper end of the middle-to-upper, high-net- worth class. I think that doesn't slow the economy maybe as quickly as it might be easy for the Fed. Then now you have a tension between the Fed of, "How far do we have to raise rates—but we don't want to hurt the economy." I think that promotes volatility. In a way, just that uncertainty inflation is big enough around the world and has that duration that we're talking about to make volatility probably a little more persistent, but without the big spikes, if you will.

Anu: Okay. That's the backdrop, which is potentially higher average volatility, but maybe fewer of the very violent swings that we've seen in prior cycles.

Derek: Yes, I think so. Again, the tech and everything that's out there, information moves so quickly and inflation is going to be potentially something that focuses everyone on a problem, and then you've got elections coming, and so that will tend to, I think, keep things higher for longer in the volatility space as well.

Anu: Makes sense. Then how can option strategies really help portfolios navigate these various inflation regimes?

Derek: Yes. When you think about the way we-- Making money over time is hard in any industry, and finance is no different, and investing, and so we really-- if you think about the simple building blocks of: you can loan, you can lend money; you can own a company, equities, which are really, the two traditional ways. Option markets allow you to be in the underwriting or almost like the insurance business of collecting premiums and underwriting risk or providing risk protection.

That element, I think, diversifies the cash flows that, whether it was munis or dividends that people have grown accustomed to, and you've seen massive growth in just derivative-based strategy. So the familiarity is there, the convenience and the wrappers that come with ETFs and stuff. The option market really just adds that additional, what we consider a very long-term way of monetizing or earning extra returns by providing risk control or, in some ways, even speculation. People want to buy call options and speculate on upside. That's not free. Somebody's paying for that.

Anu: There's various ways that you can use these in portfolios, and as you said, sometimes they can be used as diversifiers for cash flows. Just bigger picture, how do option strategies generally fit into a multi-asset investor's portfolio?

Derek: It's really, as anything, investor-specific, but the big one is just cash flow and income. What you'll see, there's, I guess, hedged, then you have the idea of structured outcomes so that you can invest in something that is maybe equity-based but looks more like a fixed-income instrument, or has a specific floor, or protection to the downside, or upside participation. Those products have become pretty prevalent. That's just kind of changing the way a duck quacks, I guess, as opposed to anything really new.

So those fit pretty well into portfolios, and I think everyone finds whether that's fixed- income-like or equity-like. Then when you move on into a little bit more dynamic strategies, it is hard. Depending on the alternatives, the liquid alternatives, hedge funds, that bucket is where you find most of the stuff, but there's no real clear definition, which makes it still, I think, a pretty growing and under-utilized space.

Anu: As we continue talking about portfolio construction, I do want to talk about overlays as well. Explain to the audience what exactly is an overlay and what problem does adding an overlay actually solve versus just allocating to a standard commingled fund?

Derek: Yes. Well, if it doesn't fit, just do an overlay. To your first question or the earlier question, the solution is really to do the capital-efficient overlay. Derivatives markets offer a pretty unique sense of where you can use portfolio margin where you're posting your assets, fixed-income, money markets, equities as collateral, and then utilize that to gain the option exposure as an overlay. Whether it's collecting premium, whether you're hedging or speculating or writing covered calls on your portfolio to collect some more premiums.

Again, back to the, "If it doesn't fit, the simple way is just, well, I don't have to do anything; I don't have to change or reshuffle my deck to then implement this strategy." In a way, it's kind, of the technology has caught up. A lot of these platforms, meaning the investment houses and brokers, offer accounts where you don't have to fund them or put assets in them, and you're able to cross-margin your assets. That's been a huge leap, more so from just tech as much as investment.

That's allowed to unlock a lot of this potential where you can collect these premiums. You can do things without finding a bucket or selling something and realizing a capital gain just to gain access to something else. That flexibility has been a huge tailwind and will continue to be. It's just getting started.

Anu: This is a technique that institutional investors have been using for some time. It sounds like it's almost like a democratization of this approach.

Derek: Yes, no, that's a very good point. When you look around the world, you can name it, currencies, commodities, and now derivatives, institutions have used these in kind of a levered or partially funded or an overlay structure for decades. To bring that to high-net-worth investors and the sophisticated retail crowd is just the trend that you continue to see across the industry, whether it's the Robinhoods trying to bring in IPOs to a broader set, derivatives have become accessible to a whole new crowd that is quite sophisticated in and of themselves with the use of the derivatives.

Anu: Essentially, again, just to make sure we clarify here, it's using your own portfolio to borrow against it. How does this end up functioning? A little bit like a loan? Is that a good way to think about it?

Derek: Yes. What you're referencing is this new synthetic borrowing or box spread trades. A unique use case for derivatives, particularly big S&P 500 index option markets, is very similar to like repo and Treasuries, or borrowing against your assets, where instead of having for platforms and investors that don't necessarily have private banks or don't have a margin extension, you can go out to the option market and basically structure a non-directional, non-volatility-exposed, zero-coupon bond. You basically collect cash upfront with the expectation, or with the obligation—not expectation, big difference—with the obligation to pay it back at a specified time, and, you know, the par amount or what is ultimately due, in exchange for paying a pretty competitive interest rate.

Just like any market where there's a risk-free rate, option markets have an embedded risk-free rate plus some spread for the risk and the compensation and that you can participate in directly as an individual investor now. Earlier, that has not been available to investors in my career until most recently. With that, that borrowing then is a completely new liability management tool. No longer is it just your credit cards or margin loans or home equity lines, you now have a way to use your own asset portfolio in a very competitive borrowing or lending environment.

Anu: So now, what are some really practical uses of this strategy for an investor?

Derek: One of the huge benefits is it's pretty flexible and unencumbered. You can pay your tax bill if you have periodic payments for your tax bill and you don't want to pay it off until the end of the year. You can buy a car. You can take the cash out and instead of getting the auto loan, you just go and write the check for the car. Houses, some of the ultra-high net worth space definitely uses it for second homes and of the likes.

The real benefit is if you can borrow money and we're going to pay for it with a traditional loan, a home equity loan, this is just as accessible, if not a little bit more convenient to structure one, two, three-year loan. Where it doesn't really work is you don't go too far out on the maturity spectrum. Once you get to three to five years, it's much more like an ARM or something of that nature that people might be familiar with, but it's got a lot of flexibility.

Anu: It sounds like it is really replacing more expensive variable-rate financing as well.

Derek: Yes, that's a good way to look at it.

Anu: Our podcast name is Disruptive Forces, and we talk all about innovations. This isn't a brand new technique necessarily, but the access is really what's new, I think, for some folks. Let's end by looking ahead. Where do you see these options markets and these types of strategies heading over the next 5 to 10 years?

Derek: Well, I think the growth—if you look, there's so many ways that they've been utilized to date. You have 'zero days to expiration' where people were almost making the zero, binary outcomes on betting on day-over-day, which is one end of the spectrum, where you think of how high-frequency that is, to structuring a three-year loan to go buy a second home or a car, and everything in between, from income. It's really just the adoption of, a lot of the platforms are still catching up. I think that we're in the middle innings here.

Options aren't yet a household, but 15 years ago, 20 years ago when we started doing some of the things we do. It's hard to imagine that the retail or the high-net-worth industry is actually now accelerating more in options than even the institutions are. I would say the institutions are a little bit slower. They've got boards, they have some complications. It's only upward from here, and I think the innovation continues, particularly with ETFs and some of the popularity there.

To draw it all back together, I think with interest rates being a viable source of income, and inflation potential, I think bonds start to give equities a run for their money, which then makes the tension between asset allocation the way it used to be. It's kind of a return to normal, and we're going to be normal for longer. I think options is going to be that new tool that helps navigate that in a way that we haven't seen, which then feeds back into the space just becomes bigger and bigger for the time being. A little meandering, but I think that's just a way of saying it's just getting started.

Anu: Exciting times ahead, I think. Kudos to you and your team. For years, you've done such a great job just educating advisors and RAs and family officers about what these are so that so many more people can unlock some of the benefits of these types of strategies. Derek, I cannot let you go without a quick bonus question. Outside of the office, markets, I'm very curious, what is the most volatile thing in your life?

Derek: It depends on the weekend, but this time of year down in Florida is probably my son's baseball team's, or actually I should say opposing team's parents. It's like, whether it's hockey or lacrosse or whatever sport, they all have their moments. For whatever reason, I found lately that people just have very little patience for umpires or just things that go wrong. It's also the heat. We're standing on 110-degree turf fields waiting for 12-year-olds to run around to be smart with a baseball, and everybody's pride is on the line. Layer in a few overzealous dad coaches and you know, VIX is 30 when we go to the baseball fields.

Anu: Exactly. That's a funny way to put it. Well, good luck to your kids and their games and managing emotions on the sidelines. This was a great conversation. We started off discussing why volatility has actually been fairly contained in 2026 despite a rather stressful backdrop. We talked a little bit about the Fed not being pinned to one side of the map, and it's a good way to remind us all about where inflation risk actually sits.

We, importantly, talked about overlays and how there's more access for investors to use their own collateral through box spreads, and essentially a zero-coupon loan against assets that they already own, making things more accessible to more people, which I think is really exciting. Thank you, Derek, for coming on and sharing those thoughts. We look forward to having you again soon.

Derek: Always a pleasure. Thank you, Anu.

Anu: To our listeners, if you've enjoyed what you've heard today on Disruptive Forces, you can subscribe to the show from wherever you listen to your podcasts, or you can visit our website at nb.com/disruptive forces where you can find previous episodes as well as more information about our firm and offerings.