The covered call trading strategy uses call options to generate extra income from stock investments without much added risk.
No wonder income-focused investors like these trades. But for those who don’t want to dabble in options yourself, there’s a handful of single stock covered call ETFs that let you benefit from the strategy without the need to trade options.
Let’s take a look at some of them and see if they’re worth your time…
A call option gives the buyer the right to purchase the underlying stock at a specified price, called the strike price, until a designated expiration date. This feature of call option contracts gives them value to traders. A call buyer pays a premium with the expectation or hope that the stock price will climb above the strike price.
The covered call trade gets its name because a trader buys the stock shares and then sells calls backed by those shares. The trade provides income from the sold option premium and share price appreciation potential up to the selected option strike price.
A company called Yield Max Funds has started to issue ETFs that use a covered call strategy for popular stocks. These funds give the returns of the covered call strategy without the need to trade options. Currently, three single-stock, covered call funds are available:
- YieldMax TSLA Option Income Strategy ETF (TSLY)
- YieldMax AAPL Option Income Strategy ETF (APLY)
- YieldMax NVDA Option Income Strategy ETF (NVDY)
These funds are accessible with share prices of around $20. Distribution rates are massive, ranging from 35% for APLY to 75% for TSLY. NVDY yields right in the middle of those two rates. These funds are just a few months old, so take those distribution numbers with a very large grain of salt.
These funds use a synthetic stock strategy to mimic owning the underlying shares. To do so, they purchase puts and long-term at-the-money call options. Short-term calls are sold to generate income. According to the TSLY prospectus, the sold calls are initiated at strike prices 5% to 15% out of the money. The funds hold short-term U.S. Treasury securities as collateral in connection with the fund’s synthetic covered call strategy.
These covered call ETFs are an interesting way to invest in Tesla Inc. (TSLA), Apple Inc. (AAPL), and NVIDIA Corp. (NVDA). The prospectus notes that the ETF shares are subject to any losses in the underlying stocks and that using the covered call strategy caps gains. However, 5% plus appreciation potential per month is not unattractive.
If you are interested in these particular stocks and like the idea of earning big dividends with those investments, take a look at these three ETFs.
— Tim Plaehn
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Source: Investor Place