Geopolitical tensions, crucial elections, and trade tariffs are having a direct impact on the market. Just think that in the first 100 days of Donald Trump’s presidency, the S&P 500 index lost almost 7%. In such a situation, many investors are seeking shelter and looking for new investment opportunities beyond traditional instruments, as well as considering markets outside the US.
Finding supplemental income for a portfolio can sometimes be a challenging task. Options-based strategies, such as covered calls, can help in this regard by generating income and assisting investors in navigating the market under various conditions while managing risks. These strategies invest in specific assets, such as stocks in an index, buying or selling call and put options on those same stocks to attempt to achieve the desired result. For an investor, covered call strategies, which combine purchasing stocks with selling call options, may seem quite complex, as they require knowledge of trading, timing, and the ability to manage potential margin calls. For those who do not want to miss the diversification opportunities these strategies offer, without worrying about the management, covered call ETFs are the ideal option. And for those looking to expand beyond US stocks, Global X – which has been managing covered call strategies for over 10 years – has just launched the Global X EURO STOXX 50 Covered Call UCITS ETF (SYLD LN) on the market.
The Key Word: Diversification
The classic investor portfolio is made up of stocks and bonds, but as recent history has shown, this diversification may not be enough.
Covered call ETFs could help diversify income, making it less dependent on economic conditions, outside of stock or market volatility, potentially leading to a more consistent income throughout the year. “These strategies can generate higher income compared to preferred stocks by collecting option premiums, particularly in sideways or slightly bullish markets,” explain Global X experts.
However, covered call strategies are not without risks: premiums help offset losses but do not fully protect against downturns.
A Shelter from Volatile Markets
Covered call strategies, by selling a call option, receive a premium that can help reduce, at least partially, the impact of a falling market, like the one that the global stock markets have just experienced. Indeed, the premiums paid to the ETF provide an additional source of income. In a time of geopolitical uncertainty and market volatility, having flexible instruments in the portfolio exposed to various sectors can make the difference. For example, compared to traditional equity opportunities, certain options strategies can achieve a more efficient balance between income and growth, increasing portfolio yield.
This is true when the market is uncertain and volatile. In the case of rising equity markets, however, due to the upside limitation imposed by covered calls, the gains that could have been made by holding the underlying stock or index are limited.
Long-Term Investing: Between Strategy and Tactics
From a long-term perspective, the market can never grow consistently, as by nature it is destined to experience periods of downturns and uncertainties, not to mention that successful stocks are bound to change over time. Covered call strategies can generate high income over the long term while diversifying the source of risk in a portfolio, as “calls are written on diversified indices like the EURO STOXX 50, rather than on individual company stocks. They can also help increase income certainty and consistency by paying monthly distributions,” experts explain.
As mentioned earlier, in the case of a strongly bullish market, strategies such as covered call ETFs could lead to underperformance, as they would forfeit the upside of the index exposure, receiving only the premium. But in both a sideways market and a bearish market, these strategies could strengthen the portfolio by keeping the premium received from selling the call option, which will offset part or all of the underlying market’s decline.
In conclusion, in a changing market environment, adding a covered call ETF to the portfolio, whether as a core position or as a satellite investment providing an alternative source of income, can offer flexibility and greater stability to the investment portfolio.
