Income remains hard to come by. This scenario is only exacerbated by the Federal Reserve’s interest rate hikes, which are plaguing bonds.
Add to that, broader market volatility could creep higher. Combine these factors, and the time could be right to consider covered call exchange traded funds, such as the Global X Nasdaq 100 Covered Call ETF (QYLD). QYLD, which is the largest ETF in the Global X stable, follows the Cboe Nasdaq-100 BuyWrite V2 Index.
In plain English, QYLD writes or sells call options on the widely followed Nasdaq-100 Index (NDX), bringing robust income to a benchmark not usually known for big yields.
“You can enhance a stock’s return by selling call options against the shares. The strategy—called ‘overwriting’ or a ‘covered call’—is a relatively simple building block of the options market. On any given day, innumerable investors sell calls on stocks that they own. There are many ways to implement the strategy, but many investors pick calls that are about 10% above the stock price and expire in 30 to 45 days,” reports Steven Sears for Barron’s.
Among the various options strategies, selling covered calls is only slightly removed from “basic” territory, but that doesn’t mean it’s easy to execute on a consistent basis. Since it’s an income-generating strategy, consistency matters.
Additionally, identifying the right stocks on which to sell calls is a burden that many investors don’t have time for. QYLD makes life easier on that front.
“The strategy pays investors for agreeing to sell their stock at a higher price. Should the stock price remain below the strike price, investors can keep the call premium. If the stock price exceeds the strike price, investors don’t have to sell their stock—they can ‘roll’ the position out one month or more to avoid assignment. Ideally, an investor gets paid for rolling the call,” according to Barron’s.
Rolling calls is another endeavor that can be tricky for novice options investors, underscoring the utility of the QYLD strategy.
The $7.16 billion Global X ETF delivers the income goods. Its trailing 12-month distribution rate is 13.86%, and it has delivered uninterrupted monthly distributions for more than eight years, according to issuer data.
For more news, information, and strategy, visit the Nasdaq Investment Intelligence Channel.
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.