Simple Covered Call Strategies for Income-Oriented Investors

Find Out About Global X QYLD

One of the problems we're having with today's economic environment is particularly impacting income-oriented investors. Is that you? Are you looking for income from your investments? You've been struggling for years in this situation, haven't you? Because interest rates have been at historically low levels for the past several years. And it's a real challenge if you've been trying to generate income out of your investments. It hasn't been too much of a pity party because, oh, for the past decade or so, even though you haven't been getting a whole lot of income out of your bank, interest rates being very, very low and your bonds have not been generating very much in yield, so what? The bonds have been rising in value and so has the stock market. So even though you haven't been generating a lot of income, you've been generating a lot of growth, and that growth has compensated for the lack of income. All has been good.

But suddenly, like the beginning of this year, that story changed. Stocks haven't been rising. In fact, they've been falling. Bonds, not only are they still paying low rates of interest, but they’ve been falling in value as well. And so this has been a real unexpected shock for income-oriented investors who tend to be older and more fiscally conservative for obvious reasons. If you're in retirement, you care about generating income off of your assets and if you’re already retired, your attitude is rightly so. You don't have 50 years to make up the losses that you may be incurring. So it's been a real challenge.

All About the Covered Call Writing Strategy

That's why I want to mention for you an idea that we haven't really talked about much on this radio show over the past, oh, 20 or 30 years. But it's something that is worth consideration today because today's economic situation is different than it's been for the past 20 or 30 years. So I'm going to mention something that I wrote about in my first book, The Truth About Money, and I haven't talked about this since I wrote that book. That was in 1997. It's called covered call writing, and it's been around forever.

It's a very popular strategy by people who know what they're doing on Wall Street and sophisticated, experienced investors. But it's probably something you haven't heard of, something you're not familiar with, and probably, I'm sure, something you're not engaging in. But it's really worth your consideration in an environment like this. When I mentioned covered call writing, the first question is what on earth is he talking about? Well, covered call writing is one of eight strategies within the world of options trading. Oh, my goodness gracious. Options trading. Well, we know that trading options is very high risk, very speculative.

You see a lot of late-night infomercials with 'get rich quick' schemes on trading options. And frankly, options trading is very risky most of the time. In fact, six out of eight times. But you see that, as I said, there are eight different kinds of options, contracts that you can deal with. And of those eight, six are meant to make money, and they do so in a very speculative way. It's almost like a lottery ticket or a straight-out gamble.

A Defensive and Protective Approach to Options

But of those eight, two of them are not speculative at all. In fact, they are meant to be defensive, protective. And one of them is called covered call writing. So I want to explain it to you here very briefly to give you a basic understanding of how it works. And then I'm going to show you an incredibly easy way for you to participate.

So what is covered call writing? All right. I've just mentioned three words and I want to break down each one of them. We're going to begin with the fact that you buy a stock or a mutual fund of stocks, could be an S&P 500 index fund, for example, or an index fund of the NASDAQ or some other index. But you own stocks or a fund of stocks. Now, there's only one reason that you own it. There's only one reason anybody would ever own stocks or a fund of stocks.

It's because you think that they're going to go up in value. All right. Why else would you buy it if you didn't think it was going to rise? But while you're owning it, you're not getting any immediate benefit. You're not generating any income off of that investment. And that's part of your dilemma. So the first thing you're going to do is sell to somebody else. Oh, not your shares. You want to keep your shares, right? That's why you own them. You think they're going to go up in value. But what you're going to do is sell to somebody. Instead of selling them the shares, you're going to sell them the right to buy your shares in the future.

Let me give you a very practical example of this. Let's say that you own a stock and it's worth $100 right now, and you think the stock is going to go up to $110 - a 10% gain. In the meantime, you're not getting any income out of it, so you're going to sell to somebody else. The right for them to buy your shares from you for $105. Now, if that happens, you make a $5 profit because they're going to pay you $105. The problem is you were hoping the stock would go to $110, which means you're giving up some of the profit, some of the profit potential.

Why would you be willing to do it? They're going to pay you a fee. It's called a premium. And they're going to pay you that premium in order to get the right to buy your shares at $105. Why are they willing to do it? Because they agree with you that the stock's going to go to $110. They're happy to pay you $105 if the stock goes to $110. They make a profit, too. You make a profit - $5, and they make a profit on everything above that amount.

And for now you earn the premium - the fee they pay for this privilege that gives you immediate income. So you are giving someone else the right to call your stock away. That's why it's called a covered call writing. They're “calling” the stock from you, and it's “covered” - meaning you own the stock. That's why it's called a “covered call”. You could do this on a stock you even didn't own. That's an uncovered call. We're not going to talk about that.

The bottom line is this: You can generate income by offering people the right to buy your shares from you in the future, and they'll pay you a fee for that. If the stock never goes up, they're never going to exercise their option. But you get to keep their money. If the stock does go up, you sell it to them.

But so what? You've made a profit and you've collected the premium. Heads you win, tails you win even more. This is a really cool idea. Now I'm sure your head is already spinning over the methodology of this. I've used jargon already... covered, call, writing and premiums. There are all kinds of complexity in doing this, and I'm sure you don't want to go to school figuring all this out. You don't want to take the time involved in engaging in these options contracts. You're not even sure how to trade them in a brokerage account. 

Simple Option: Global X Nasdaq 100 Covered Call ETF - QYLD

Here's the good news. You don't have to. Today there are ETFs that do covered call writing for you. One of the biggest, one of the most popular is coming from Global X Nasdaq 100 Covered Call. The symbol is QYLD. This fund has $7 billion in it. That's how much money investors have contributed because they like the fact that this fund basically buys the Nasdaq 100 stock index and then sells covered calls generating income 6% to 12%. Now, the good news is you're generating all that income. The better news is if the stocks go up in value, you're earning that profit in addition to that income. This is why the fund is so popular and has $7 billion invested. That fund from Global X ETFs is one of just 14 options trading ETFs that Global X offer. And they give you a wide variety of options that determine how much income you can reasonably expect to generate, maybe as low as 6%, maybe as high as 12%. 

How much growth in value you can expect? Maybe a lot, maybe a little. And this is why they offer a wide array. Some of it is passively managed using the S&P 500 or the NASDAQ 100. Some of it uses more active approach to investment management. The point is that there are a wide variety of investment options available with ordinary ETFs. For you, it's a set it and forget it approach, but it generates the kind of income that you're not able to find in other investment options. So I encourage you to talk to your financial advisor about Global X ETFs covered calls opportunities. Because if this isn't something you've looked at in the past, it's certainly something to consider looking at right now. You can learn more at GlobalXETFs.com or talk with your financial advisor about covered call writing.