The Nationwide Risk-Managed Income ETF (NYSEArca: NUSI) is an increasingly popular income strategy. Aside from its tempting, NUSI delivers for investors on another front: taking the work and some of the risk out of selling individual covered calls.
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.
“Covered-call writers cap their gain on the stock at the strike price, plus the premium collected, which may create an opportunity cost if the underlying stock climbs high enough. Getting out of the position also may require not only selling the stock but also buying back the option, which will reduce the premium collected,” reports Nick Ravo for Barron’s.
Removing Some Risk
The Nationwide Risk-Managed Income ETF uses an options trading strategy called a protective net-credit collar to generate income. The options strategy sells an upside call option and uses a portion of the proceeds received to buy a put option to hedge downside risk on an underlying portfolio of securities.
“Covered-call writers may also lose a dividend—and suffer unforeseen tax consequences, such as a short-term capital gain—if their stock trades high enough above the strike price immediately before an ex-dividend date, as the option’s owner may exercise the call, take the stock, and claim the dividend,” according to Barron’s. “Writing calls also generally freezes the holding period to determine if the underlying stock could be taxed as short-term or long-term gain.”
These are issues facing investors writing calls on their own, but NUSI ameliorates those concerns by doing the leg work for investors while delivering steady monthly income.
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.
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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.