ETF Chart of the Day: Calling on Covered Calls

When you have an equity market that looks like the one we are currently in coupled with what most measures suggest is a “low volatility” environment, with a slow and steady approach to it along basic trend-lines even with some blips and hesitations here and there but an affirmative path higher over time where “buying the dip” always seems to work given enough time, some managers look to “covered call” strategies.

Specifically, recent action in the SPY (SPDR S&P 500, Expense Ratio 0.09%) 200 strike calls (SPY currently has a $193 handle so these are only slightly out of the money at this point) may have some managers interested in selling upside, in return for call premium at this point.

For example, a profile of such a manager may fit the following: “has been net long either via individual stocks or index ETFs that track the S&P 500 for greater than the trailing twelve month period and is comfortable at being called out of positions, should we have additional upside from current all-time high levels.”

There comes a time when some managers may believe that market prices have outpaced fundamentals, and while not outright bearish on equities, some trimming or trading around positions, even via covered call strategies may make plenty of sense, not to mention may be an excellent re-positioning conversation to use as selling points to clients whom have grown accustomed to the “buy the dip” nature of this market and at times, seemingly easy money.

This said, SPY has still net attracted new assets at least lately, largely given number one component AAPL’s continued strong run in the short term.

Covered call ETF strategies that are out there that may find a more interested audience today than they would have say 6 to twelve months ago given the overall gains, especially in U.S. Large Caps include the largest in the segment, PBP (PowerShares S&P 500 BuyWrite Portfolio, Expense Ratio 0.75%), which has about $287 million in assets under management.

There are several other newer, but notably smaller ETP strategies in this space as well including HSPX (Horizons S&P 500 Covered Call, Expense Ratio 0.65%), and BWV (iPath CBOE S&P 500 BuyWrite Index ETN, Expense Ratio 0.75%), which only have $27 million and $10 million in AUM respectively, as clearly they are not on everyone’s radars yet.