Additionally, the actively managed AdvisorShares STAR Global Buy-Write ETF (NYSEArca: VEGA) employs a covered call strategy through global stocks ETFs, including emerging markets and developed EAFE countries, along with some international bond exposure.[related_stories]
The covered-call options strategy allows an investor to hold a long position in an asset while simultaneously writing, or selling, call options on the same asset. Traders would typically employ a covered-call strategy when they have a neutral view of the markets over the short-term and just bank on income generation from the option premium.
While these buy-write ETFs may not produce any phenomenal returns compared to the broader equities markets, their underlying option strategy helps them generate outsized yields.
For instance, HSPX gained 4.1% year-to-date while the S&P 500 rose 6.6%. However, HSPX has also generated a 4.98% 12-month yield, compared to the S&P 500’s dividend yield of just over 2.0%
QYLD is down 1.6% year-to-date while the Nasdaq Composite is 0.7% higher. QYLD, though, shows a robust 10.33% 12-month yield.
In a flat market condition, the trader would use the buy-write strategy to generate a premium on the option. If shares fall, the option expires worthless and one still keeps the premiums on the options. However, the strategy can cap the upside of a potential rally – the trader keeps the premium generated but any gains beyond the strike price will not be realized. Consequently, in a stock market rally, the buy-write strategy has underperformed the equities market.
Through market cycles, the buy-write strategy basically replaces the long-term positive returns of the equity market with the premium generated in options pricing, foregoing capital gains from equities for yield generation.
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Full disclosure: Tom Lydon’s clients own shares of QYLD.