By Nick Griebenow of Shelton Capital Management
To this point of the year, 2022 has generally been a tough year for investors. Stocks, as measured by the S&P 500, finished the first half of the year down a stunning 20.6%, the benchmark's steepest first-half decline in 50 years. Bonds have also struggled mightily. The widely-followed Barclay's US Aggregate Bond Index was down about 10% in the first half of the year, putting the fixed income benchmark on pace for one of the worst years in its history.
What's driving this wild pricing? The Fed? Surging inflation? Runaway gas prices? Ukraine? We'll offer no opinion on the reasons behind the head-spinning volatility. Explanations don't tend to matter much to investors looking at their shrinking brokerage statements. What matters is what they do about it.
A BIT OF HISTORY
After a decade of bullish markets – and two years of particularly astronomical returns – it's easy to forget that uncertainty is a fact of life in the investment markets. In just over a decade, we've endured the 2008–2009 financial crisis, the 2010 Greek government-debt crisis, and the 2011–2012 European debt crisis.
Then, of course, we just encountered the 2020 COVID-19 market, where indexes dropped into bear territory in March, only to bounce back quickly and post record highs before the end of 2020.
Each of these disruptions were different, but there is a common thread that runs through them: They didn't last long. Not including the 2020 downturn – which at 33 days, is history's shortest bear market -- the average bear duration is about one year. In other words, volatility has always given way to growth, usually in short order.
WHAT'S THE INVESTOR TO DO?
While all of this is reassuring, we suspect it provides little solace to the investor who's just watched their portfolio drop by nearly 20% in some cases.
We also suspect the old bromide about focusing on the long term and sticking to a plan doesn't help calm an investor's nerves either. Nor does the suggestion that a volatile stock market is a great time to rebalance portfolios, which essentially means dumping the positions that are down the most. That hardly feels good to begin with, and you're still left to figure out where to go with those depleted funds.
Here's what's worse: An investor who's been unfortunate enough to suffer the worst of this year's volatility – a 20% drop -- will need their portfolio to gain 25% to get back to even.
Maybe the better approach is to win by not losing as much.
A COVERED CALL STRATEGY IN A RISING RATE ENVIRONMENT
Moving forward, we expect to see volatility remain elevated, held up by the continuing war in Ukraine, recession fears, and rate increases domestically. We anticipate that higher yields, elevated volatility, tighter financial conditions, and slowing economic growth will make for a choppy market for the foreseeable future.
Options are more than just a tool for managing volatility - they offer a way to capitalize on it. Option prices typically move in tandem with volatility. Thus, premiums received tend to be higher, offsetting some losses on the way down.
Owning high-quality names with strong balance sheets while selling covered calls to dampen volatility and generate cash flow can be one of the best strategies to execute in this environment.
There are a variety of ways an advisor can seek to limit volatility in their clients' portfolios, and a well-managed option strategy is one of them. Shelton Capital has a robust and knowledgeable options team which manages mutual funds and separately managed accounts that are customizable to meet a client's goals.
Important Information
Options involve risk and are not suitable for everyone. Prior to buying or selling an option, your client must receive a copy of characteristics and risks of standardized options. Copies of this document may be obtained from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500, Chicago, IL 60606 (1-800-678-4667).
Nick Griebenow, CFA is a portfolio manager at Shelton Capital Management and the Shelton Equity Income Fund.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Shelton Capital Management
Shelton Capital Management (SCM) is a boutique investment firm that helps investors meet financial goals through tailored investment solutions and human-centric customer service. Founded in 1985, the company provides mutual funds, ETFs, and separately managed accounts to the clients of wealth managers, retirement plans, and individual investors. As of 9/30/25, the firm manages over $6 billion across fixed income portfolios, U.S. equity and international equity strategies, ESG solutions, and equity income products leveraging our expertise in options. Over the decades, we’ve collected awards from established sources such as Morningstar, Lipper, Forbes Advisor, and Pension & Investments. The company continues to add key employee talent and expand their institutional expertise. Shelton is headquartered in Denver, Colorado with additional offices in San Francisco. For more information, visit www.sheltoncap.com.
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