In these low-yield times, covered calls are becoming an increasingly important of the income-generating lexicon. That scenario shines a light on the Nationwide Risk-Managed Income ETF (NUSI).
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.
“Selling covered calls is an options trading strategy that helps you earn passive income using call options. This options strategy works by selling call options against shares of a stock that you buy beforehand or already own,” according to Investment U.
One obvious benefit of NUSI is that its exchange traded funds wrapper ensures investors don’t have to worry about writing calls themselves.
Leave it to NUSI
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.
A covered call refers to an options strategy where an investor writes or sells a call option on an asset which they already own or bought on a share-for-share basis to generate income via premiums derived from the sale of the call options.
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.
“Ideally, the underlying stock stays out of the money until the call option expires. Out of the money means the call’s strike price is above the market price. And if that’s the case, it’s almost never exercised and you get to keep the full income you received from the trade,” according to Investment U.
Conversely, an at the money call can result in the stock being called away, a risk investors don’t have to worry about with NUSI.
For more on income strategies, visit our Retirement Income Channel.