Breaking News
Investing Pro 0
Free Webinar - The Role of Psychology in Trading - Thursday, December 8, 2022 | 04:00PM EST Enroll Now

Seeking Income Amid The Volatility? Here's A Fund To Consider

By Investing.com (Tezcan Gecgil/Investing.com )ETFsFeb 01, 2021 05:00AM ET
www.investing.com/analysis/seeking--income-amid-the-volatility-heres-a-fund-to-consider-200557684
Seeking Income Amid The Volatility? Here's A Fund To Consider
By Investing.com (Tezcan Gecgil/Investing.com )   |  Feb 01, 2021 05:00AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
NDX
+1.22%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
MSFT
+1.24%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
GOOGL
-1.30%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
AAPL
+1.21%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
AMZN
+2.14%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
GME
+11.37%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

Equity markets are volatile at the moment. The choppiness reminds most investors of the importance of diversification, such as including defensive assets in portfolios. Meanwhile, in the current low interest rate environment, passive income-seekers may be looking for ways to add income-generating products to their portfolios.

Different assets are appropriate in the search for stable yield, especially as volatility and the potential for downside risk increase. One such product that has been getting attention is a covered call fund.

Let's delve into the covered call space.

Options Have Different Uses

Options are derivative (or secondary) financial products. An option contract's value is based on an asset, such as a stock, index, bond, commodity, or currency.

There is a buyer (owner) and the seller (writer) of an option in a transaction. A "call" or a "call option" gives the owner the right to buy the underlying asset—such as a stock—at a specified price during a fixed period stated in the option contract.

An option contract has an expiration date by which contract holders have to decide if they should exercise the option or let it expire worthless. For instance, in the US, monthly equity options typically stop trading on the third Friday of the expiration month. So, monthly stock options expiring in February 2021 will cease trading on Friday, Feb. 19.

The buyer of a monthly equity option has the right, but not the obligation, to buy (or "call away") an agreed quantity of an underlying stock at the strike price from the option writer, until trading ends on the third Friday of the month. We must note that the actual technical expiry day is typically the Saturday following the third Friday. However, options stop trading on that Friday.

This limited time-span of an option contract creates unique implications for both the holder and seller. Academic research highlights:

"Options are a mechanism for trading on information about future equity volatility... [O]ptions order flows contain information about the future direction of the underlying asset."

Option contracts provide higher leverage, leading to both greater potential profits and potential losses. They can be used for speculation or hedging as part of a risk management strategy, both by individual traders but also by financial institutions and corporations.

News headlines regarding stocks like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) have highlighted the increased use of options in equity markets and their potential effects not only on portfolios, but also on the functioning of broader markets. Last week, many brokers introduced restrictions on placing (temporary) equity and/or options trades on a number of securities, causing a heated debate among market participants.

Finally, corporations outside equity markets also use derivative products. For example, options are important risk-management tools for importers and exporters for hedging currency exchange risk.

Covered Calls To Generate Income

One option contract typically represents 100 shares of a given stock. Thus to devise a covered call strategy, an investor must own 100 shares for every call contract they plan to sell. The position involves a trader writing a call option against stock they either already hold or buy at that moment.

If an investor simultaneously buys 100 shares of a stock and writes a call option against that stock position, it is known as a "buy-write" transaction. Thus the position is created on a share-for-share basis.

When an investor writes a covered call, they sell someone else the right to purchase 100 shares of the stock that they already own, at a specific price, within a specified timeframe.

Option buyers have to pay a certain amount of "premium'' to option writers, so sellers are typically motivated by this premium or income.

A covered call is a hedged strategy as the writer could deliver the stock if it is called. Covered calls are among the most widely-used options strategies. Yet, in rising market conditions, their use could hinder returns.

Nuveen NASDAQ 100 Dynamic Overwrite Closed End Fund

  • Current Price: $25.86
  • 52-Week Range: $15.24 - $27.12
  • Current Distribution (Quarterly): $0.39
  • Monthly Equivalent Distribution: $0.13
  • Distribution Rate on Market Price: 6.00%
  • Net Expense Ratio: 0.94 % per year

The Nuveen NASDAQ 100 Dynamic Overwrite Closed End Fund (NASDAQ:QQQX) enables investors to participate in a portion of the returns of the NASDAQ 100 index while generating cash flow from the sale of call options on 35%-75% of the equity portfolio.

QQQX Weekly
QQQX Weekly

Fund managers highlight the objective as achieving an attractive total return with less volatility than the NASDAQ 100 index. When they believe the index is likely to be flat or declining, they increase the covered call percentage to receive more premium and generate extra cash flow from the sale of more call options.

On the other hand, when they believe markets are to continue rising, they reduce the percentage. At present, 58% of the underlying equities are overwritten by call options.

QQQX is a closed-end fund (CEF) that trades like an equity or an exchange-traded fund (ETF). In general, closed-end funds share many similarities with ETFs. The Nuveen NASDAQ 100 Dynamic Overwrite Closed End Fund started trading in January 2007, and total assets under management stand at $1.1 billion.

It currently has 119 stocks. The top ten names comprise over 70% of the roster. Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) and Facebook (NASDAQ:FB) lead the names in the fund.

In addition to the distributions paid out quarterly, the fund has returned close to 6% over the past year. Put another way, the quarterly income generated has not come at the expense of capital, and the fund has managed to capture some of the NASDAQ 100's gains.

But we should remind readers that in the past 12 months, the NASDAQ 100 Index is up 42%. Due to the risk/return profile of a covered call strategy, an ETF like QQQX cannot beat the returns of the NASDAQ 100.

NASDAQ 100 Weekly
NASDAQ 100 Weekly

Those investors interested in dividends, as well as potential capital appreciation in the current volatile markets, might want to do further due diligence on the fund.

Seeking Income Amid The Volatility? Here's A Fund To Consider
 

Related Articles

Tim Knight
ETF Focus: Commodities By Tim Knight - Nov 13, 2022 1

Let’s look at a few commodity ETFs together. In general, they have remained in an uptrend for two years. This channel needs to break in order for commodities to start a downtrend,...

Seeking Income Amid The Volatility? Here's A Fund To Consider

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (2)
Lou Theland
Lou Theland Feb 04, 2021 6:32AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Do share price or dividends from this find go down when the stock market declines?
stephen outhwaite
stephen outhwaite Feb 01, 2021 7:51AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
As a stranger to shorts until last week, reading this, am I understanding correctly that all the monthly positions in GME etc, won't come due until Feb 19 ? That being the case it's been a bit of a phony war. The Reddit crew have made a fortune on paper but not in hard cash. To get that they need to sell their stock. The action of unloading that much stock will drive the price down playing into the shorters' hands. If I read it right those same shorters have bought large ish positions and may themselves be in a position to do just that as things calm. So we have had the phoney war, now the phoney peace as both sides try for public opinion while arming behind their backs. The real war will start on Feb 12 ish. Unless both sides have made enough before then and found some new businesses to play with. I don't know. I'm not trying to push a position, I would just like to know if I have understood you right, so that I know what to watch out for in the future
Engin Rençber
Engin Rençber Feb 01, 2021 7:51AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
no dear. hedge funds have short positions for every Friday. and they lose money every Friday. trust me, they will be forced to buy shares to make their positions even every Friday. so, GME will have a new high every Friday. big because, the short interest rate is 120%. so, they sold much they didn't have and nobody has.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email