Seeking Alpha

QYLD's Covered Call Options, Explained

by: Global X ETFs
Global X ETFs
ETF investing, dividend investing, master limited partnerships, commodities

The Global X Nasdaq 100 Covered Call ETF (NASDAQ:QYLD) is designed to offer investors with potential monthly income while seeking to lower the risks of investing in a major US index through a strategy that writes monthly covered call options on the Nasdaq 100 Index.

QYLD’s covered call position is created by buying (or owning) the stocks in the Nasdaq 100 Index (NDX) and selling a monthly at-the-money index call option. An option is a contract sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price (strike price) within a certain period or on a specific date. In return for the sale of the call option, the fund receives a premium, which can potentially provide income in sideways markets and limited protection in declining markets. However, the fund gives up that profit potential if the index rises above the strike price of the index call option.

QYLD’s Covered Call-Writing Process:

  1. QYLD buys all the equities in the Nasdaq 100 Index
  2. QYLD then sells Nasdaq 100 Index options (NDX) to a counterparty that will expire in one month
  3. A premium is received in exchange for the sale of the index options
  4. At the end of the month, QYLD seeks to distribute a portion of the income from writing/selling the NDX index option to the ETF shareholders
  5. At the beginning of each new month this process is repeated

Index Options Basics

  • Expire at the end of the month
  • Unlike single stock options that can be exercised at any time, index options cannot be called/exercised early
  • Settle in cash, not in delivering the underlying index holdings
  • Higher index volatility can lead to larger premiums
  • If there are gains from writing calls, they are taxed at 60% long term capital gains rates and 40% short term capital gains

Since the index options cannot be called early, it only matters where the index finishes for the month. Prior to expiration, all market swings that take place throughout the month don’t matter.

Market Scenarios

Down Market: In the illustrative example below, the Nasdaq 100 index ended the month below the strike price. So, QYLD which sold the call option would potentially benefit from the premium received. This may offset some or all of the decline in the underlying equity holdings.

Flat Market: If the index price has not changed at the end of the month, QYLD keeps the money it collected from selling the monthly index call and the Fund still owns the underlying equities.

Up market: If the index price rises at the end of the month, potential gain will be limited since the Fund sold a call option at a predefined strike price. As the index rises above the strike price, the Fund still keeps the money collected from selling the monthly index call option, but won’t benefit from the entire increase in the index value.

QYLD has historically distributed a high level of income to investors

PREVIOUS 12 MONTH DISTRIBUTIONS

QYLD has provided a Measure of Protection

QYLD performed better than the Nasdaq 100 index during certain downtrends.

Source: Bloomberg, between March 5and December 20, 2018. The rates of return shown are represented by NAV returns not intended to reflect future values of the ETF or the index or future returns on investment in the ETF. Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. See QYLD’s Fund Page to find the most recent month- and quarter-end performance numbers. Portions of the distribution may include a return of capital. These do not imply rates for any future distributions. The ETF is not required to make distributions. Nasdaq 100 is QYLD’s broad market benchmark.

There are risks involved with investing, including possible loss of principal. Concentration in a particular industry or sector will subject QYLD to loss due to adverse occurrences that may affect that industry or sector. Investors in the fund should be willing to accept a high degree of volatility in the price of the fund’s shares and the possibility of significant losses.

QYLD engages in options trading. An option is a contract sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price within a certain period or on a specific date. A covered call option involves holding a long position in a particular asset, in this case U.S. common equities, and writing a call option on that same asset with the goal of realizing additional income from the option premium. QYLD writes covered call index options on the Nasdaq 100® Index. By selling covered call options, the fund limits its opportunity to profit from an increase in the price of the underlying index above the exercise price, but continues to bear the risk of a decline in the index. A liquid market may not exist for options held by the fund. While the fund receives premiums for writing the call options, the price it realizes from the exercise of an option could be substantially below the indices current market price. QYLD is non-diversified.

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Global X NAVs are calculated using prices as of 4:00 PM Eastern Time. The closing price is the Mid-Point between the Bid and Ask price as of the close of exchange. Closing price returns do not represent the returns you would receive if you traded shares at other times. Indices are unmanaged and do not include the effect of fees, expenses or sales charges. One cannot invest directly in an index.

Carefully consider the Fund’s investment objectives, risks, and charges and expenses before investing. This and other information can be found in the FPlease read the prospectus carefully before investing.

Carefully consider the Funds’ investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in the Funds’ summary and full prospectuses, which may be obtained by calling 1-888-GX-FUND-1 (1-888-493-8631), or by visiting http://www.globalxfunds.com/. Read the prospectus carefully before investing.

Global X Management Company LLC serves as an advisor to Global X Funds. The Funds are distributed by SEI Investments Distribution Co. (SIDCO), which is not affiliated with Global X Management Company LLC. Global X Funds are not sponsored, endorsed, issued, sold or promoted by CBOE, nor does CBOE make any representations regarding the advisability of investing in the Global X Funds. Neither SIDCO nor Global X is affiliated with CBOE.