Simeon Hyman, CFA, Global Investment Strategist and Head of Investment Strategy at ProShares, joined Keith Black, Managing Director of RIA Channel, for a discussion on covered call strategies using options with daily expirations.
As the Fed is likely to cut rates, investors will be seeking alternative sources of income. ProShares offers the Russell 2000 High Income ETF (ITWO) ETF, which employs a daily covered call strategy. In addition to ITWO, ProShares also offers the S&P 500 High Income ETF (ISPY) and Nasdaq-100 High Income (IQQQ) ETFs, each powered by a daily covered call strategy.
Traditionally, covered call strategies have sold call options on a monthly basis. Recently, covered call strategies earned only one-third of the S&P 500 Index returns. When writing options on a monthly basis in a bull market, returns can substantially underperform stock indices.
Selling call options on a daily basis may allow investors to capture a greater portion of the index return than is earned by a monthly strategy. Because the price of options declines more quickly near expiration, selling call options on a daily basis can potentially earn income similar to or greater than the income generated through the sale of monthly call options.
WEBCAST – Rate Cuts On The Horizon? Seek High Income With More Upside Potential
Recent signals from the Federal Reserve have given markets confidence that a rate cut is likely at the next policy meeting in mid-September. While a sustained rate-cutting cycle could be a positive for stocks, as companies benefit from lower borrowing costs, it may also signal an end to an 18-month period where investors could generate healthy yields from cash, treasuries, and other so-called “risk-free” assets. In other words, the hunt for yield—a dominant theme in the wake of the 2008 financial crisis—might be back for an encore.
As investors reevaluate their income opportunities, they may also confront the classic trade-off between upside and yield. This conundrum is evident in many of the covered call and derivative income funds that surged in popularity over recent years but have largely failed to keep pace with the S&P 500 on a total return basis.1 Fortunately, developments in the daily options market offer a new path, which ProShares Global Investment Strategist Simeon Hyman will illuminate by expanding on:
- The innovation behind writing daily call options
- How investors can conveniently access the benefits of a daily call options strategy in a portfolio
- Why exposure to the small-cap Russell 2000 Index via a daily call options strategy could be appealing a rate cut may finally bring to an end an extremely long period of small cap underperformance.
Accepted for 1 CFP® / IWI / CFA CE Credit
Russell 2000 High Income ETF (ITWO)
Seek High Income Potential With Small-Cap Upside
1 Based on a ProShares analysis of a study group composed of 17 U.S. large-cap covered call ETFs with more than one year of performance history and at least $20mm in assets under management. The study group produced an average annual return of 9.9% compared to the S&P 500’s average annual return of 16.6% since each ETF’s inception. The group utilizes covered call strategies based on the S&P 500 (11/17), the Nasdaq-100 (4/17), and Dow Jones Industrial (2/17) indexes. The group represents 90% of ETF assets under management in Morningstar’s Derivative Income category. Data as of 6/30/24.