Building a CDR Options Portfolio for Different Investment Goals

Canadian Depositary Receipt (CDR) options are transforming how Canadian investors can gain exposure to U.S. equities. These Canadian dollar denominated derivatives let investors trade options with exposure to premium U.S. companies while eliminating the need for currency conversion and mitigating foreign exchange risk. As more investors discover these tools, many are moving beyond individual trades to build full portfolios that align with specific financial goals – whether that is generating income, pursuing growth, or protecting existing investments.

In this fourth installment of our five-part series, we examine how investors can design tailored CDR options portfolios that support various objectives, using familiar option strategies adapted for the unique structure of Canadian Depositary Receipts. Following our exploration of the fundamentals of CDR options, their pricing and specifications, and how they compare to traditional U.S. options, we now examine how investors can build full portfolios that match their investment goals.

Key Terms to Know:

• CDR: Canadian Depositary Receipt - a CAD-denominated security representing fractional share ownership of a U.S. stock
• Premium: The price paid to buy an option or received when selling an option
• Strike Price: The price at which an option can be exercised
• Intrinsic Value: The difference between the current market price and strike price (for in-the-money options)

Strategies for Generating Income: Covered Calls

Goal: Generate steady income on CDR holdings through options premiums.

Strategy: Covered Call – Selling call options on a CDR you already own.

How it works:

You collect a premium by selling a call option on a CDR in your portfolio. If the CDR stays below the strike price, the option expires worthless, and you retain both the CDR and the premium. If the CDR rises above the strike price, your shares may be called away, but you'll still keep the premium and realize gains up to the strike price.

Example:

An investor holds 100 CDRs of RedSole Technologies, a fictional technology company, trading at 30 CAD. They sell a call option with a $32 strike and receive a $1.50 premium per CDR.

Scenario 1: (CDR closes below $32): The option expires worthless, and the investor keeps the premium.

Scenario 2: (CDR closes above $32): Shares are sold at $32, and the investor gains $2 in capital appreciation plus the $1.50 premium.

Key Considerations:

• Liquidity: Check trading volumes and bid-ask spreads before entering positions
• Position Sizing: Consider starting with smaller positions while gaining experience
• Risk Management: Set clear exit points for both profits and losses

Why CDR Options Work Well:

Lower capital requirements and CAD-denominated contracts make covered calls especially attractive to retail investors, allowing them to enhance yield without large upfront investments.

▶️ Watch Now: Covered Call Options: Seize the Opportunity to see this strategy in action.

Strategies for Growth: Long Calls and Call Spreads

Goal: Participate in the upside potential of high-growth U.S. companies with limited downside risk.

Strategies:

1. Long Call – Buying a call option to benefit from upward price movement
2. Call Spread – Buying a call and simultaneously selling a higher-strike call to reduce net premium cost

Essential Guides:

• Long Call Strategy Guide (PDF) - Master the basics of directional options trading
• Bull Call Spread (Debit Call Spread) Guide (PDF) - Learn how to balance cost and potential return

Long Call Example:

An investor expects RiseAI CDR (a fictional AI company) to rise from its current price of $20. They buy a $22 call for $1.

If RiseAI CDR rises to $26, the option has $4 intrinsic value ($26 - $22), delivering a strong leveraged return on a $1 premium.

If the CDR does not rise, the investor's maximum loss is limited to the $1 premium.

Call Spread Example:

Buy $22 call for $1.00, sell $26 call for $0.30. Net cost: $0.70.

If the CDR rises to $26 or more, the spread is worth $4.00 (max gain), resulting in a significant return on investment.

Key Considerations:

• Time Decay: Options lose value as expiration approaches
• Volatility Impact: Higher volatility increases option premiums
• Break-even Analysis: Calculate the price needed to profit after premium costs

Why CDR Options Work Well:

The cost of a single CDR option is far lower than U.S. equivalents, enabling retail traders to implement growth strategies at a fraction of the capital and with CAD-based transparency.

Essential Guides:

• Long Call Strategy Guide (PDF) - Master the basics of directional options trading
• Bull Call Spread (Debit Call Spread) Guide (PDF) - Learn how to balance cost and potential return

Strategies for Protection: Protective Puts and Collars

Goal: Limit downside risk on CDR investments without fully exiting positions.

Strategies:

1. Protective Put – Buying a put option to hedge downside on a CDR you own
2. Collar – Combining a protective put with a covered call to reduce the hedge cost

Protective Put Example:

An investor owns 100 CDRs of CleanFusion Energy (a fictional renewable energy company), currently trading at $35. To protect against a downturn, they buy a $32 put for $1.

Scenario 1: If the CDR falls to $28, the put gains $4 in intrinsic value, offsetting the decline in the holding.

Scenario 2: If the CDR rises, the investor loses the $1 premium but benefits from the asset appreciation.

Collar Example:

• Buy $32 put (costs $1)
• Sell $38 call (receives $1.20)
• Net credit: $0.20

This strategy provides downside protection at $32 while capping upside at $38, at a net profit.

Key Considerations:

• Cost vs. Protection: Balance protection level against premium cost
• Regular Review: Monitor hedge effectiveness as market conditions change
• Roll Forward: Consider rolling options to maintain protection

Why CDR Options Work Well:

Thanks to lower option premiums, protection is more affordable. Collars, in particular, provide a low-cost hedge strategy ideal for volatile U.S. sectors like tech or clean energy—now accessible in CAD.

Protection Strategy Guides:

• Protective Put Strategy Guide (PDF) - Learn how to shield your portfolio from downside risk
• Protective Collar Strategy Guide (PDF) - Discover how to hedge positions cost-effectively

Diversifying with CDR Options

Goal: Spread your investment risk and avoid relying too heavily on one company, sector, or strategy.

Why Diversification Matters:

A well-diversified portfolio helps smooth out returns by reducing exposure to the performance of a single asset. With CDR options, diversification can be achieved in multiple ways—by combining different sectors, time horizons, and trading strategies.

How to Diversify Using CDR options:

Across Sectors:

• Use CDR options on companies from different industries like technology, healthcare, energy, and consumer goods to reduce sector-specific risk.

Across Strategies:

• Combine income strategies (like covered calls), growth strategies (like long calls or call spreads), and protection strategies (like puts or collars). This helps balance potential gains with downside protection.
• Match strategies to market outlook

Across Time Horizons:

• Mix short-term and long-term options based on your market outlook. Short-dated options may respond quickly to news, while longer-dated options give your strategy more time to play out.

Across Market Conditions:

• Use options that benefit in various scenarios: rising markets, falling markets, or sideways markets, so you are better prepared regardless of which way the market moves.

Key Benefits from Diversifying with CDR options:

• Lower capital requirements mean you can build multi-strategy portfolios even with modest investment amounts
• CAD-denominated trading eliminates currency conversion
• Built-in currency hedging ensures all strategies remain focused on company fundamentals rather than FX fluctuations

Whether you are aiming for steady income, capital growth, or downside protection, a diversified CDR options portfolio helps manage risk while keeping your investment approach flexible and accessible.

Purpose-Driven Portfolios with CDR Options

CDR options empower Canadian retail investors to execute sophisticated strategies, generate income, pursue growth, hedge risk, and build diversified portfolios with greater clarity and control. Whether you are a seasoned trader or exploring options for the first time, these instruments offer tailored solutions aligned with your financial goals, all while remaining accessible and cost-efficient in Canadian dollars.

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