Low interest rates are confounding income investors, but there are ways to address today’s low-yield environment. One way of doing that is with covered calls, an objective made easier with 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.
Investors face a historically low-yielding market amidst the backdrop of rock-bottom interest rates and tight credit spreads.
“With interest rates at an extremely low level, investors have to hunt for yield elsewhere, especially when they are living off the income their assets generate, e.g. in retirement. Dividend-paying stocks are one possibility to generate a sizeable yield on one’s investment, but options can be another way to do so,” according to Seeking Alpha.
Calling on Covered Calls
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.
“When an investor sells a call option while holding the stock at the same time, this is called selling a covered call option. In case the stock price of the underlying rises a lot, there is no risk of huge losses, whereas that could be true when selling call options without owning the underlying (also called selling naked call options),” according to Seeking Alpha.
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.
Conservative investors looking for added yield, dependable income and downside protection, which NUSI offers, are apt to find the Nationwide ETF to be an attractive addition to income-starved portfolios.