A covered call is a stock market strategy where an investor owns a stock and sells a call option on that same stock. The call option gives the buyer the right, but not the obligation, to buy the stock from the seller at a predetermined price, known as the strike price, within a certain time period.
By selling the call option, the investor receives a premium payment from the buyer, which provides additional income. If the stock's price remains below the strike price, the investor keeps the premium and continues to hold the stock. If the stock's price rises above the strike price, the buyer of the call option may exercise their right to buy the stock from the investor at the strike price, and the investor would realize a profit on the stock sale, but would no longer hold the stock.
Overall, the covered call strategy is used to generate income while also potentially limiting potential losses if the stock price were to fall.
Many ETFs (Exchange-Traded Funds) are managed using the covered call method, which involves selling call options on a portfolio of underlying securities to generate income. Here are some examples of ETFs that use the covered call strategy:
1. Invesco S&P 500 BuyWrite ETF (PBP)
2. iShares Russell 2000 ETF (IWM)
3. Global X NASDAQ 100 Covered Call ETF (QYLD)
4. Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
5. First Trust Morningstar Dividend Leaders Index Fund (FDL)
It's worth noting that while covered call ETFs can provide additional income, they may also have lower potential for capital appreciation than traditional ETFs that do not use options strategies. As with any investment, it's important to understand the risks and benefits before investing.
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