Recon Capital Advisors, a new entrant in the exchange traded fund arena, launched the first ETF to track a covered call strategy based on the Nasdaq-100.
The Recon Capital NASDAQ-100 Covered Call ETF (NASDAQ:QYLD) reportedly began trading Thursday, Dec. 12.
According to the latest prospectus filing, QYLD will try to reflect the performance of the CBOE NASDAQ-100 BuyWrite Index, which measures the return on call options written on the 100 companies included in the Nasdaq-100 through a "buy-write" or covered call strategy.
Specifically, the underlying index will write, or sell, a succession of one-month call options on the Nasdaq-100 Index and will cover the options by holding the underlying securities.
A covered call is an options strategy that takes a long position in an asset and sells or "writes" call options on that same security in an attempt to generate additional income through the sale of the call options. By utilizing a covered call strategy, an investor who owns a stock sells call options, and collects the income from the premiums paid by the buyer of the option.
"In return for the payment of a premium to the Fund, a purchaser of the call options written by the Fund is entitled to receive a cash payment from the Fund equal to the difference between the value of the NASDAQ-100 Index and the exercise price of the option if the value of the option on the expiration date is above its exercise price," according to the filing.
Covered call writing is a method for generating additional income from a stock portfolio beyond what would otherwise be provided on its own from dividends or other distributions. It has also been used to enhance a portfolio's yield while reducing volatility.
"The Fund's covered call options are expected to partially protect the Fund from a decline in the price of the NASDAQ-100 Index through means of the premiums received by the Fund," according to the filing.
The covered call strategy has outperformed during bear markets, range-bound markets and slightly bullish conditions. However, during strong bull rallies, the covered call strategy has historically fallen behind as the underlying securities would surge through their strike prices.
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.