Tag Archives: covered calls

A Little Known ETF, Recon Capital, Comes Out Big in Its First Year

January 30, 2015 MarketsMuse Staff Reporter Leave a comment

MarketMuse update courtesy of ETF Trends, Tom Lydon. Tom Lydon highlights Recon Capital ETF that follows a covered call strategy successful first year.

A little unknown exchange traded fund that follows a covered call strategy has generated robust dividend yields over its first year.

The Recon Capital NASDAQ-100 Covered Call ETF (NasdaqGM: QYLD), which began trading on December 12, 2013, has provided a distribution yield of 10.4% in 2014, according to a press release.

QYLD provides a covered-call strategy that targets Nasdaq-100 securities. Additionally, for those who rely on regular income payments, the ETF provides monthly distributions.

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.

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.

During last year’s rally, QYLD underperformed the broader market, rising 3.6% over the past year. Nevertheless, the ETF somewhat made up the difference through its robust income generation on option premiums.

The monthly options premiums also provided a buffer from market volatility and helped hedge traditional investment allocations. The covered-call ETF strategy may act as a decent alternative investment strategy to a traditional equity and fixed-income portfolio, especially in the environment ahead.

“Unlike many fixed income investments, QYLD faces no headwinds from rising interest rates, nor is it susceptible to duration risk,” Kevin R. Kelly, Managing Partner of Recon Capital, said in the press release. “Rather, QYLD seeks to provide investors with a low volatility, non-leveraged, tax-efficient product that pays out a monthly income, instead of making distributions by quarter or on an annual basis. We are proud to round out 2014 – and the first year of QYLD trading — with a 10.4 percent yield for our investors, particularly as the 30 Year Treasury sits below 2.75 percent.”

ETF News, Strike Price

Credit Suisse Lists Covered-Call Gold ETN; $GLDI w Exposure to $GLD

January 29, 2013 MarketsMuse Staff Reporter Leave a comment

Courtesy of Cinthia Murphy and Olly Ludwig

Credit Suisse on Tuesday launched its Credit Suisse Gold Shares Covered Call ETN (NasdaqGM: GLDI), a strategy that provides long exposure to physical gold coupled with an overlay of call options.

The ETN, comes with an annual expense ratio of 0.65 percent, will have notional exposure to the bullion ETF SPDR Gold Shares (NYSEArca: GLD) while notionally selling monthly “out of the money” call options, the fund’s prospectus said.

The strategy is designed to enhance current cash flow through premiums on the sale of the call options. Those premiums will be received monthly in exchange for giving up any gains beyond 3 percent a month. In other words, the premiums would soften the blow if GLD were to face a sell-off, but that’s the extent of the fund’s downside protection.

There’s still growing uncertainty in the market on whether the 12-year-long gold rally has run its course, which makes Credit Suisse’s launch of GLDI timely, as the ETN represents a somewhat neutral view on gold.

ETNs are senior unsecured obligations; in this case, of Credit Suisse’s Nassau branch. Unlike ETFs, they have no tracking error, but, also unlike ETFs, they represent a credit risk. For example, if Credit Suisse ever faced bankruptcy, holders of GLDI would likely lose their entire investment.

ETF News, Strike Price

Covered Calls Vs. Selling Puts On The SPY

April 10, 2012 MarketsMuse Staff Reporter Leave a comment

Courtesy of Seeking Alpha’s “Reel Ken”

We often hear about selling covered calls to generate additional income. We also hear about selling Puts to generate income. So the question becomes: Which is a better strategy?

The first step in answering this question is to understand that, from a performance perspective, they are two sides of the same coin. That is, if you owned, say 100 shares of the SPDR S&P 500 ETF (SPY) and sold a covered call with a strike of, say $140, in theory you would get a similar result by simply selling a put option with a strike of $140. Reality is a little different.

Let’s look at why this is so. SPY is currently trading at $139.79. The January 2013 $140 strike call sells for $7.99. If SPY closed at or above $140, I would make 21 cents on SPY and $7.99 on the covered call for a total of $8.20. However, SPY pays a quarterly dividend averaging about 66 cents, and the SPY shares would earn this dividend. There are three dividend events (June, September and December) totaling $1.97. So my total return would be $10.17 ($7.99 + $0.21 + $1.97).

In contrast, the $140 strike put sells for a credit of $10.15. If SPY closes at or above $140, this total credit is earned profit and compares favorably to the $10.17 combined return from the covered call. So, the covered call and sold put are about equal.

If SPY closed below $140, the equivalence stays intact, but I’ll leave it to the reader to do the math.

What about other option expiration dates? Continue reading →