Why to Call on Covered Calls for Steady ETF Income

With bond yields low it’s getting tricky to generate income, but advisors and investors can consider options writing strategies, including the Global X Nasdaq 100 Covered Call ETF (QYLD).

QYLD is an income-generating spin on the Nasdaq-100 Index (NDX), an index lightly allocated to dividend-offending sectors, such as energy and real estate, while heavily allocated to leaders with strong balance sheets, such as the technology and communication services sectors. QYLD’s income is derived from writing covered calls on the NDX.

The fund receives a premium from writing the call options, which can help increase the fund’s distributions and potentially mitigate downside risks.

As volatility rises, so too does the size of the premium that can be generated by writing a call option. QYLD presents a single solution for investors looking to incorporate a small cap covered call strategy, who may otherwise need to accept significant time and expense to operate this strategy individually.

QYLD 1 Year Total Return

Any Income is Good Income

A covered call refers to an options strategy where an investor writes or sells a call option on an asset that they already own or bought on a share-for-share basis in order to generate income via premiums derived from the sale of the call options. Investors have long capitalized on covered call options strategies for income generation.

These funds enable “collaboration with portfolio management teams to optimize overwriting strategy on a stock by stock, product by product basis by customizing the portfolio overwrite percentage, strike prices and duration of options,” adds BlackRock.

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 typically employ a covered-call strategy when they have a neutral view of the markets over the short-term.

Investors face a historically low-yielding market amidst the backdrop of rock-bottom interest rates and tight credit spreads.

“In this extraordinarily low rate environment, investors continue to eagerly explore alternatives to fixed-income,” said Rohan Reddy, research analyst at Global X ETFs. “Increasingly, they are utilizing covered call strategies because of their high yield potential and minimal duration risk.”

While these buy-write ETFs may not produce any phenomenal returns compared to the broader equities markets, their underlying options strategy helps them generate outsized yields.

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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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