Covered calls, or selling options, can be a meaningful addition to investors’ income strategies. For those that want that income without having to monitor the options market, the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI) is the perfect idea.
NUSI is an actively managed portfolio of stocks included in the Nasdaq-100 Index and an options collar. Per index rules, the fund only invests in the top 100 largest by market cap, nonfinancial stocks listed on NASDAQ. A collar strategy involves selling or writing call options and buying put options, thus generating income to hedge some downside risk. The strategy seeks to generate high current income monthly from any dividends received from the underlying stock and the option premiums retained.
“A covered call can compensate to a small degree if the stock price drops, the short call expires OTM, and the short call’s profit offsets the long stock’s loss,” writes Scott Connor, director of trader education at TDAmeritrade.
The Nationwide Risk-Managed Income ETF incorporates options exposure to help generate income and mitigate risk as a way to enhance total returns. Investors have long capitalized on covered call options strategies for income generation or protective put options strategies to protect against and limit losses.
“You might be giving up the potential for hitting a home run if XYZ rockets above the strike price, so covered calls may not be appropriate if you think your stock is going to shoot the moon. But in markets that are moving more incrementally, this strategy could be beneficial,” notes Connor.
NUSI can act as a complement to traditional equity and fixed income allocations or as the ideal protective hedge for investors with heavy exposure to technology and growth stocks because the fund is a “rules-based options trading strategy that seeks to produce high income using the Nasdaq-100 Index,” according to Nationwide.
By selling calls and buying puts, NUSI presents investors with dual avenues for downside protection. Call writers typically want the underlying security to stay flat or decline somewhat because call options are long positions with unlimited upside potential.
“Covered calls, like all trades, are a study in risk versus return. With the tools available at your fingertips, you could consider covered call strategies to potentially generate income,” according to Connor.
To learn more about NUSI, read its fact sheet here.
For more on income strategies, visit our Retirement Income 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.