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A covered call strategy is an investing technique that saves one from market selloffs to a large extent. The strategy involves holding a long position in a stock and selling call options on the same stock to generate additional income. During the time of a selloff, while the primary stock position loses value as the stock price drops, the premium from the call options partially cushions it from the ill impacts.
In this strategy, there are two benefits. First is income generation, which implies premiums from selling options and second is downside protection, where the premiums provide a small protection from potential losses in the stock.
Historically, covered call strategies have outperformed their underlying securities in bear, range-bound, and moderate bull markets but lag during strong bull rallies when securities frequently and sharply exceed their strike prices.
Why Invest in Covered Call Strategy Now?
Although the Fed enacted a 50-bp rate cut this month, the market rally is wavering. U.S. stocks faltered on Wednesday after markets hit all-time highs. Investors expressed doubts over the health of the economy and the chances of another solid rate cut.
Consumer confidence fell in September as Americans grew increasingly worried about a cooling labor market. The latest index reading from the Conference Board was 98.7, below the 105.6 seen in August and lower than what the 104 economists surveyed by Bloomberg expected, as quoted on Yahoo Finance. The drop in consumer confidence from August to September was the largest decline since August 2021, according to the Conference Board.
Moreover, new home sales declined in August following an increase in the prior month as still-high mortgage rates as well as high prices kept buyers from entering the housing market. Also, some investors continue to fear that the huge AI investments made by big tech companies will pay off later than expected.
The scale of profitability of those investments is also unknown now, while the high valuation of the AI stocks is a concern for many investors. Meanwhile, the Fed rate cut and the resultant decline in bond yields should boost the demand for high-income assets.
As a result, the time could be beneficial for investing in a covered call strategy. Below, we highlight a few covered-call exchange-traded funds (ETFs) that could be proper investments at the current level.
The ETF TSPY looks to participate in S&P 500 growth via SPY. The ETF sells daily (0DTE) options with the goal of generating high levels of income. The ETF aims to reduce volatility and account for risk with execution. The ETF charges 68 bps in fees.
The underlying CBOE NASDAQ-100 BuyWrite V2 Index measures the total return of a portfolio consisting of common stocks of the 100 companies included on the NASDAQ-100 Index and call options systematically written on those securities through a buy-write or covered call strategy. The fund charges 61 bps in fees and yields 10.90% annually.
The underlying Cboe S&P 500 BuyWrite Index seeks to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. The fund charges 60 bps in fees and yields 9.25% annually.
This ETF is active and does not track a benchmark. The fund is the first ETF to utilize zero days to expiry (“0DTE”) options on an innovation index (the "Innovation-100 Index" as defined in the Fund Prospectus). QDTE seeks to provide overnight exposure to the Innovation-100 Index and generates income each morning by selling out-of-the-money 0DTE calls on the Index. The fund charges 95 bps and yields 18.33% annually.
The JPMorgan Equity Premium Income ETF seeks current income while maintaining prospects for capital appreciation. The ETF’s equity portfolio employs a time-tested, bottom-up fundamental research process with stock selection based on our proprietary risk-adjusted stock rankings. Disciplined options overlay implements written out-of-the-money S&P 500 Index call options that seek to generate distributable monthly income. The fund charges 35 bps in fees and yields 7.08% annually.
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Tap Covered Call ETFs to Earn Higher Income
A covered call strategy is an investing technique that saves one from market selloffs to a large extent. The strategy involves holding a long position in a stock and selling call options on the same stock to generate additional income. During the time of a selloff, while the primary stock position loses value as the stock price drops, the premium from the call options partially cushions it from the ill impacts.
In this strategy, there are two benefits. First is income generation, which implies premiums from selling options and second is downside protection, where the premiums provide a small protection from potential losses in the stock.
Historically, covered call strategies have outperformed their underlying securities in bear, range-bound, and moderate bull markets but lag during strong bull rallies when securities frequently and sharply exceed their strike prices.
Why Invest in Covered Call Strategy Now?
Although the Fed enacted a 50-bp rate cut this month, the market rally is wavering. U.S. stocks faltered on Wednesday after markets hit all-time highs. Investors expressed doubts over the health of the economy and the chances of another solid rate cut.
Consumer confidence fell in September as Americans grew increasingly worried about a cooling labor market. The latest index reading from the Conference Board was 98.7, below the 105.6 seen in August and lower than what the 104 economists surveyed by Bloomberg expected, as quoted on Yahoo Finance. The drop in consumer confidence from August to September was the largest decline since August 2021, according to the Conference Board.
Moreover, new home sales declined in August following an increase in the prior month as still-high mortgage rates as well as high prices kept buyers from entering the housing market. Also, some investors continue to fear that the huge AI investments made by big tech companies will pay off later than expected.
The scale of profitability of those investments is also unknown now, while the high valuation of the AI stocks is a concern for many investors. Meanwhile, the Fed rate cut and the resultant decline in bond yields should boost the demand for high-income assets.
As a result, the time could be beneficial for investing in a covered call strategy. Below, we highlight a few covered-call exchange-traded funds (ETFs) that could be proper investments at the current level.
Covered Call ETFs in Focus
TappAlpha SPY Growth & Daily Income ETF (TSPY - Free Report)
The ETF TSPY looks to participate in S&P 500 growth via SPY. The ETF sells daily (0DTE) options with the goal of generating high levels of income. The ETF aims to reduce volatility and account for risk with execution. The ETF charges 68 bps in fees.
Global X Nasdaq 100 Covered Call ETF (QYLD - Free Report)
The underlying CBOE NASDAQ-100 BuyWrite V2 Index measures the total return of a portfolio consisting of common stocks of the 100 companies included on the NASDAQ-100 Index and call options systematically written on those securities through a buy-write or covered call strategy. The fund charges 61 bps in fees and yields 10.90% annually.
S&P 500 Covered Call ETF (XYLD - Free Report)
The underlying Cboe S&P 500 BuyWrite Index seeks to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. The fund charges 60 bps in fees and yields 9.25% annually.
Roundhill N-100 0DTE Covered Call Strategy ETF (QDTE - Free Report)
This ETF is active and does not track a benchmark. The fund is the first ETF to utilize zero days to expiry (“0DTE”) options on an innovation index (the "Innovation-100 Index" as defined in the Fund Prospectus). QDTE seeks to provide overnight exposure to the Innovation-100 Index and generates income each morning by selling out-of-the-money 0DTE calls on the Index. The fund charges 95 bps and yields 18.33% annually.
JPMorgan Equity Premium Income ETF (JEPI - Free Report)
The JPMorgan Equity Premium Income ETF seeks current income while maintaining prospects for capital appreciation. The ETF’s equity portfolio employs a time-tested, bottom-up fundamental research process with stock selection based on our proprietary risk-adjusted stock rankings. Disciplined options overlay implements written out-of-the-money S&P 500 Index call options that seek to generate distributable monthly income. The fund charges 35 bps in fees and yields 7.08% annually.