Amid the scramble for alternative income streams, covered calls via the Nationwide Risk-Managed Income ETF (NUSI) are increasingly appealing.
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 calls are an old investing methodology, but one that does not get much attention. That said, employing covered calls can be a great income strategy,” according to Nasdaq. “So what is a covered call? Simply put, it is the process of selling call options while simultaneously holding the underlying shares.”
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.
Counting on Covered Calls
As volatility rises, so too does the size of the premium that can be generated by writing a call option. NUSI presents a single solution for investors looking to incorporate a small cap covered call strategy, who may otherwise need to accept significant time and expense to operate this strategy individually.
“The idea is to earn income from selling the call options while hedging risk by holding the underlying shares. The ideal outcome is that the underlying share price rises but does not hit its strike price, yielding the seller both the income from selling the option and the capital appreciation of the shares,” according to Nasdaq.
Covered call strategies 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.
Traders would typically employ a covered-call strategy when they have a neutral view of the markets over the short-term and just gather income from the option premium. While NUSI may not produce any phenomenal price returns compared to the broader equities markets, the underlying options strategy helps the fund generate outsized yields.