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Yield Opportunity with a Covered Call ETF Strategy

With the equities market slowing down after a multi-year rally, investors may find opportunities in exchange traded funds that track buy-write or covered-call strategies.

“Many investors overlook buy-write/covered call strategies, as their objective is to provide monthly income without interest rate or duration risk,” according to Recon Capital.

For instance, the Recon Capital NASDAQ-100 Covered Call ETF (QYLD) , which follows a covered-call strategy that targets Nasdaq-100 securities, shows a 9.08% 12-month yield. According to Recon Capital, QYLD has distributed between 0.61% to 1.06% per month since its inception on December 12, 2013.

“The monthly options premiums collected may serve as a buffer from market downswings in the Nasdaq 100 Index, lowering the volatility of the portfolio,” according to Recon Capital.

Along with the attractive yields, QYLD has been doing quite well, compared to the Nasdaq. Year-to-date, QYLD gained 6.1% while the PowerShares QQQ (QQQ) , which tracks the Nasdaq-100, rose 8.7%.

The covered-call options strategy allows an investor to hold a long position in an asset while simultaneously writing, or selling, call options on the same asset. Traders would typically employ a covered-call strategy when they have a neutral view of the markets over the short-term and just bank on income generation from the option premium.

In a flat market condition, the trader would use the buy-write strategy to generate a premium on the option. If shares fall, the option expires worthless and one still keeps the premiums on the options. However, the strategy can cap the upside of a potential rally – the trader keeps the premium generated but any gains beyond the strike price will not be realized. Consequently, in an easy-money fueled stock market rally, the buy-write strategy has underperformed the broader equities market. However, with stocks expected to slowdown ahead, a buy-write strategy may be a good way to play a more sideways market.

Additionally, investors can also take a look at the Powershares S&P 500 BuyWrite Portfolio (PBP) , the largest buywrite ETF based off the S&P 500, and the Horizons S&P 500 Covered Call ETF (HSPX) , which also employs a covered call strategy on the S&P 500. Year-to-date, PBP rose 2.7% and HSPX dipped 1.3%. PBP has a 2.18% 12-month yield and HSPX shows a 3.8% 12-month yield.

For more information on the covered call strategy, visit our buywrite category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.