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Hi,
In EU we dont have any CC ETF on indices. I find solution with spanish index IBEX35 buying LYXOR IBEX 35 TotalReturn ETF and selling ATM CC on IBEX mini index option (1xmultiplier). before i start to testing i need to know how this CC ETF funds exactly work.As a example i have takem RYLD CC ETF which buy VTWO ETF on Russell 2000 and sell ATM CC on RUT. I read this https://www.globalxetfs.com/content/files/Options_Strategy_Overview.pdf There is written that Buy reference index components, write monthly ATM 1 index calls on 100% of the fund's portfolio in an effort to maximize income.
I don't know if I understood correctly. Example RUT value will be 8000 points (1xmultiplier) and VTWO will be 80USD i buy 100 shares od VTWO which has value 8000USD and i sell 1 contract ATM CC option on RUT strike price 8000 premium will be 3%=240USD. after 30 days option expire worthless becose its below strike price. Price of index will be 7000 and value of ETF VTWO will be 70USDx100 shares=7000USD . Than the portfolio manager sell this 100 shares total value will be 7000+240 premium total 7240 fund has loss 760USD and than he buy 103 shares x70 in value of 7210USD and than sell 1 contract ATM CC option with strike price 7000 premium will be 3%=210USD and so on?
Did I understand that well?
Can you help answer these questions from other members on NexusFi?
Im not an expert, so happy to be corrected but heres somethings Ive learned. Covered calls means you own the underlying and sell away the upside...this means that if there is a big rally then you miss out on it,
if the underlying goes sideways then you make $$$ but if it goes lower then you take all the risk less whatever premium you made.
So shares the go sideways for years it works out well, in the other 2 cases it kinda sucks.
In your example if you sell in ATM contract, you will most likely often be called to sell your underlying as well, so you need to remember
that you would continuously need to repurchase the underlying again. Typically you sell a Call thats like 2-3% above the current market,
which also means what you make is very little.
Also, to take note, if the option expires worthless, it could be that you also lost money on your underlying, you just lost less than holding it by itself.
So to work out if the strategy is profitable, you need to take into consideration
- profit/loss made on option
- profit/loss made on underlying
- fees for re-investing
That means if Index CALL option is expire ITM price index close 9000 portfolio manager sell complete portfolio receive 9000USD total with premium 9240USD pay the diffrence 8000-9000=1000USD and for 8240 repurchace again index portfolio for 8240/90=91,55 shares and sell again Index Call option ATM 9000 Is that correct?
But when price of Index close on 7000 which is below strike price option expire worthless. Do the same again portoflio manager sell complete portfolio and repurchace portfolio together with premium or he hold the portfolio 80USDx100 and only he buy more shares for lower price70USD from the premium?
I have no experience with these indexes so you need to plug in the values yourself, so Im just guessing at things like fees and gearing.
Index Long @ 8000, gearing of 1, Sold OTM Call for $2, Strike @ 8400
Market moves to 8250
- Long made profit (8250-8000)= $250,
- Call made profit of $2*100=$200,
- Fees = $20 (total) TOTAL 250+200-20 = $430
Market moves to 7750
- Long made profit (7750-8000)= -$250,
- Call made profit of $2*100=$200,
- Fees = $20 (total) TOTAL -250+200-20 = -$70
Market moves to 8800
- Long made profit (8400-8000)= $400, (you sell/capped at strike)
- Call made profit of $2*100=$200, (you still get this money)
- Fees = $20 (total) TOTAL 400+200-20 = $580
With my example though the $2 for the option is usually not as nice, the further away the smaller the value.
Buffet uses this strategy to get rid of his stock that he doesnt mind holding onto.
Its more for that than a really good strategy, overall it typically makes 10-15% per year...which isnt great for the risk you take on imo.
If you are going to sell any options , It is recemented you know all about volatility and implied volatility and how time decays the value of said options . your chances of being successful are much better . you have the correct Idea , you want to be selling options not buying them .
