As investors scramble to deal with dividend cuts and depressed bond yields, alternative income ideas such as covered call writing stand out. For many investors, the Nationwide Risk-Managed Income ETF (NUSI) is a more practical idea for accessing the benefits of these 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 strategies such as NUSI can potentially augment a portfolio during periods of heightened volatility. The covered-call options allow an investor to hold a long position in an asset while simultaneously writing, or selling, call options on the same asset.
NUSI Makes It Easy
While covered calls offer income-generating benefits, the strategy can be tricky, particularly when investors are going it alone on individual equity holdings.
“First, do not use this strategy with positions that you are unwilling to sell. Sooner or later the positions will be called away from you, albeit at a nice profit if you execute it correctly. However, if shares do start to rise and you begin to have second thoughts, below I add some pointers on what you can do,” writes Robert Napier for Investing Daily.
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.
Another “caveat is not to use this strategy if you don’t want to lock in a loss. For example, if you bought shares of a company for $100, and they are now trading at $70, don’t sell a call with an $85 strike price unless you are willing to potentially lock in that loss,” according to Napier.
NUSI eliminates that burden.