Unlock Income Potential: Master the Covered Call Strategy Against Market Downturns

Investors seeking a relatively stable income source and protection against market volatility might consider adding a covered call ETF to their investment portfolio. A covered call ETF employs a strategy called covered call writing to generate income for investors. This strategy involves selling call options on the securities that are already owned, in exchange for a premium. The premium received from selling the call option adds to the investor’s income*.

What are Covered Call ETFs?

Covered call ETFs typically invest in a diversified portfolio of stocks and utilize the covered call writing strategy on a portion of their holdings. By employing this strategy, the ETF can generate additional income for investors while still providing exposure to the underlying stocks in the portfolio.

This strategy aims to reduce volatility and provide a steady income stream. The ETF invests in stocks and sells call options, giving buyers the right to purchase the stocks at a predetermined price. If the stock price doesn’t reach that price at the expiry date, the ETF keeps the premium as income. If the price does reach the predetermined level at the expiry date, the ETF raises cash to settle the option but still keeps the premium. While this strategy limits potential gains, it provides relative stability and income for investors.

• Reduced volatility: Selling call options acts as a hedge during market downturns, reducing portfolio volatility.
• Income Solution*: Aim to generate income through option selling and distribute it monthly to investors (dividend payout ratio is not guaranteed, dividends can be distributed out of capital#).

* While Covered call writing limits upside potential to some extent, it provides a relatively stable income for investors especially during rangebound scenarios.

# Positive distribution does not mean positive return. Payments of distributions out of capital or effectively out of capital amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment. Any such distributions may result in an immediate reduction in the Net Asset Value per Share of the Fund and will reduce the capital available for future investment.