These types of investments perform better in volatile conditions. Using the covered call options strategy, the ETFs sell higher strike prices on securities with greater volatility and lower strikes on low-vol stocks, capturing a greater premium.
By implementing a covered call strategy, an investor who owns a stock sells, or “writes,” call options and collects the income from the premiums paid by the buyer of the option, essentially allowing someone to collect a base fee today for their stock shares in exchange for any potential upside in the future.
Jon Najarian, Co-Founder of optionMONSTER and tradeMONSTER, explains how the call premium can also help cushion a potential decline in the markets. If the markets fall, the premium collected can help offset potential loses as compared to taking a full long position in the stock.
“They won’t fully protect you against the down side like a put option would, but the strategy allows you to be be in the ETFs or stocks you want to be in with some protection,” Najarian said.
Joe Cunningham, Executive Vice President and Head of Capital Markets for Horizons ETFs Management, explains that the covered call ETFs, HFIN and HSPX, are rules-based index-tracking ETFs that provide a monthly distribution. He also points out that these ETFs are best suited when the markets are not in a bull rally. For instance, in August, when stocks sold off, the covered call strategies picked up some of the volatility.
Financial advisors who are interested in learning more about the covered call strategy can listen to the webcast here on demand.