The First Nasdaq-100 Covered Call ETF

December 12th at 2:08pm by Tom Lydon

Recon Capital Advisors, a new entrant in the exchange traded fund arena, launched the first ETF to track a covered call strategy based on the Nasdaq-100.

The Recon Capital NASDAQ-100 Covered Call ETF (Nasdaq: QYLD) reportedly began trading Thursday, Dec. 12.

According to the latest prospectus filing, QYLD will try to reflect the performance of the CBOE NASDAQ-100 BuyWrite Index, which measures the return on call options written on the 100 companies included in the Nasdaq-100 through a “buy-write” or covered call strategy.

Specifically, the underlying index will write, or sell, a succession of one-month call options on the Nasdaq-100 Index and will cover the options by holding the underlying securities.

A covered call is an options strategy that takes a long position in an asset and sells or “writes” call options on that same security in an attempt to generate additional income through the sale of the call options. By utilizing a covered call strategy, an investor who owns a stock sells call options, and collects the income from the premiums paid by the buyer of the option. [A Covered Call ETF Helps Boost Your Income]

“In return for the payment of a premium to the Fund, a purchaser of the call options written by the Fund is entitled to receive a cash payment from the Fund equal to the difference between the value of the NASDAQ-100 Index and the exercise price of the option if the value of the option on the expiration date is above its exercise price,” according to the filing.

Covered call writing is a method for generating additional income from a stock portfolio beyond what would otherwise be provided on its own from dividends or other distributions. It has also been used to enhance a portfolio’s yield while reducing volatility. [Covered Call ETFs Boost and Diversify Income Portfolios]

“The Fund’s covered call options are expected to partially protect the Fund from a decline in the price of the NASDAQ-100 Index through means of the premiums received by the Fund,” according to the filing.

The covered call strategy has outperformed during bear markets, range-bound markets and slightly bullish conditions. However, during strong bull rallies, the covered call strategy has historically fallen behind as the underlying securities would surge through their strike prices.

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Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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