Demystifying options: what investors should know

Three takeaways:

• Options value is linked to an underlying security. The combined securities can be packaged together into strategies.
• Option strategies can introduce new exposures into a portfolio or help structure specific investment positions. They can help reduce, shift or transform risk and returns.
• When implemented appropriately, options may expand the ability to deliver desired client outcomes and help manage risk. For some investors, they can be a useful but underutilized investment tool.

What better way to start 2026 than by deepening our understanding of a long-standing investment category experiencing rapid growth? Increasing popularity of option-based ETFs (Outcome ETFs) and option-based SMAs (option overlay SMAs) are further fueling investor adoption of options.

If you google the word “options,” you will likely come across the financial definition: an option is a contract, between two parties, agreeing to transact at a future date. You might also come across various unfamiliar terms. At their core, options are derivatives, meaning they “derive” their value from another security. They are investment tools, and when used appropriately may help improve portfolio outcomes.

What is so unique about options?

Since their value is linked to an underlying security, they can be packaged together to help modify the risk and return characteristics of an underlying holding. Option strategies can take an equity holding and essentially reduce its exposure – as a buffer or hedge against the downside risk. In other cases, they seek to shift return drivers from capital appreciation to potential income. Option strategies can introduce new exposures into a portfolio or help position for specific investment results. Overall, they can help reduce, shift or transform risk and returns.

• Reduce Risk - Seeks to reduce the volatility of the underlying investment. Option strategies in this category are designed to lessen your exposure to the underlying holding. The tradeoff of reducing downside exposure, while minimizing upfront cash outlay, is giving up potential upside. Different option strategies have different degrees of potential risk reduction and forwent upside.

• Shift Return - Shifts the characteristic of returns towards income and cash flow. Option overlay strategies in this category are designed to generate cash flow for investors. The strategies are often selling call options (covered calls/buy-writes). This means clients are giving up upside in exchange for potential cash flow. Income from options is not like fixed income, it is possible to have option losses that affect investment holdings even with the distribution of cash.

• Transform Exposure – Options can change how an investment behaves. Options are non-linear; they do not move point-for-point with the underlying security. Their value changes differently depending on how markets move. When you combine options with a linear exposure (like owning AAPL), you can change how that linear investment behaves. For example, you can package an option strategy on top of AAPL so it creates an index-like exposure. You can package options to create a structured-like exposure, providing areas of accelerators, caps, buffers and floors. Tradeoffs always exist. In this category, it is important to evaluate the potential risks as well as what you are gaining and giving up by introducing these new exposures.

Why options for your investment portfolio?

• Target outcomes: The value of an options contract is tied to an underlying asset / investment holding. Option strategies can help clients target a risk and return profile with a level of certainty that traditional investments may not offer. This makes them a vital tool for goals-based investing.
• Navigate uncertainty: The world and markets have evolved, and so too should portfolios. Professionally managed option strategies seek to deliver certain outcomes in the uncertain and ever-changing world of investing.
• Implement flexibly: Over the years, technology has increased investor access to option-based strategies, unlocking a whole new world of portfolio design. Evolution in product development increases implementation accessibility across wrappers and portfolio types.

Why options for your practice?

• Brokerage to advisory: We view the investment landscape shifting from brokerage to fee based. Amid this backdrop, advisors are transitioning from products with incentives baked in (commissions and trails) into managed products where the incentives are aligned with growing a client’s wealth consistently over time. Clients use option strategies to help unlock brokerage assets like concentrated stock and cash.
• Attract high net worth clients: The growing US Wealth market is becoming increasingly competitive and concentrated. Advisors are looking for differentiated solutions and a way to scale their practice. Over half of the U.S. Wealth client base has $5mm+ in AUM . Options offer a differentiated approach to tackling the biggest challenges HNW clients face including:
• Wealth preservation
• Greater access
• Liquidity events and income streams
• Concentrated wealth
• Tax minimization

• Scale investment process: As SMAs and ETFs continue to grow, advisors can add personalization and scale to their practice by outsourcing to professional managers.

When implemented appropriately, options expand the ability to deliver desired client outcomes and manage risk. They may be an essential but underutilized investment tool.

If you would like to learn more, please contact your BlackRock representative or check out our options website. For more information on options basics, check out our option education page.