How To 'Write' Covered Calls For Safe 8% Yields

| About: Recon Capital (QYLD)


Most investors buy stocks and hope they’ll go up in price.

Instead, why not generate cash flows of 8% or more from these holdings by selling covered calls?

Let's discuss popular exchange-traded funds (ETFs) and closed-end funds (CEFs) that will help you generate 8% yields or better from this income strategy without actually handling any options.

Most investors buy stocks and hope they'll go up in price. They do nothing in the interim to generate cash flow from those stocks while they sit in their portfolio - like writing covered calls.

"Write" what?

I'll explain. And I'll also highlight some popular exchange-traded funds (ETFs) and closed-end funds (CEFs) that will help you generate 8% yields or better from this income strategy without actually handling an options contract yourself.

A call option is a contract that gives its buyer the right to purchase a stock from the seller for a certain price within a certain period of time. For that right, the buyer pays the seller a sum upfront, called a premium.

Of course there's a catch - otherwise option traders would be the richest people in the world! And the caveat is time. When you buy a call option, not only do you need the share price to move higher for you to make money - but you also need it to happen within a relatively short timeframe.

With each day that passes, options decay in value. That's bad for buyers, but great for sellers - those who collected the premium up front. With each passing day, they grow richer. They don't have to worry about the clock. In fact, it's their friend.

Recon Capital's NASDAQ 100 Covered Call ETF (NASDAQ:QYLD) takes money from option buyers. It buys the Nasdaq index, and writes calls just above the current price that expire in about a month.

For a 0.60% management fee, you can outsource your option selling to QYLD. The fund pays a net 8.6% annual yield than thanks to the premiums it sells to option buyers, and the capital appreciation it enjoys from the index itself.

This sounds like a good strategy - and it is - but there are a couple of big flaws in QYLD's execution:

It'd reap larger premiums by selling covered calls on individual NASDAQ stocks, and It should be selling options with even shorter expiration times to maximize the value that expires with each passing day.

Over time, these miscues add up. Since inception, QYLD has been less volatile than the NASDAQ (as you'd expect). But its investors are missing out on most of the index's upside:

QYLD Gets Killed

If only there were a human at the helm!

Fortunately we can upgrade to a living, breathing money manager for a modest fee. For example, Keith Hembre runs the Nuveen NASDAQ 100 Dynamic Overwrite Fund (NASDAQ:QQQX) and employs a strategy more nuanced than my simplified example. He actually buys the individual stocks, and sells call options against them.

Keith usually sells options on 35% to 75% of the portfolio. He ups the percentage when Nuveen's indicators look bearish (to protect on the downside) and holds more "uncovered" positions when tech looks bullish (to maximize upside).

In exchange for his expertise, our management fee is 0.93%. That's money well spent - Keith has earned his paycheck, with his hedged gains keeping pace with the unhedged gains provided by the NASDAQ itself:

The Human Touch Matters When Selling Calls

QQQX pays a 7% annual yield. It sells for about its net asset value (NAV) today, but has traded for at an average 5.1% discount to NAV over the past six months.

(Steep discounts to NAV are another benefit of CEFs - basically free money - thanks to the market inefficiencies in this underappreciated corner of the income world.)

I like free money in addition to my high yields, so I prefer to purchase CEFs when their discounts are high. Keep an eye on this one - like most of its ilk, it's only a matter of time before it gets tossed back in the bargain bin.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I write these editorials for, where I have premium paid publications that I make money from.

About this article:

Tagged: , , Alternative Investing, SA Submit
Problem with this article? Please tell us. Disagree with this article? .