XYLD Is Holding Up Better Than SPY

XYLD Is Holding Up Better Than SPY

Adrian Vidal/iStock via Getty Images 2022 has presented investors with nothing but volatility, inflation, rising commodity prices, geopolitical tensions, and declining major idiocies. Gold of all things has appreciated by 10.10% YTD, and many of the high-flying growth stocks which were loved in 2020 have lost 50%, 60%, 70%, or more from their highs. Investors look for strong income-producing vehicles to drive yield to their portfolios when it comes to income investing. Regardless of whether you’re utilizing the income to live off of or diversify your investment mix, reliable dividends are important.

I am a fan of the Global X Covered Call ETFs and have been writing about them for some time. Many investors seemed interested but were reluctant because they were never tested throughout a correction, while other skeptics called them gimmick funds that wouldn’t hold up through a hard market environment. If the first three two and a half months of 2022 aren’t classified as a hard market, I don’t know what is. YTD, the SPDR S&P 500 Trust ( SPY ), has declined by -12.07% compared to the Global X S&P 500 Covered Call ETF ( XYLD ) declining by -7.19%. The chart below is certainly interesting as at no point in 2022 has XYLD declined further than SPY. YTD, XYLD has declined by 4.88% less than SPY, which clearly indicates that this fund can hold up just fine in a declining market vs. the index. Seeking Alpha Options for income, but aren’t they supposed to be risky? I think Covered Calls are a sound way to generate income and XYLD does all the work for you

As options become more mainstream, I hope that more people understand there are ways to utilize options as income vehicles and not just as an instrument to control blocks of shares for a fraction of the cost. Some types of options can be extremely volatile, and even if you understand how to utilize options, they can be risky, so please do your homework when it comes to the options market.

Covered Calls are much different than buying options contracts. All options contracts are based on 100 shares. Once you own 100 shares of an equity, you can sell a contract against your shares which is referred to as writing a Covered Call. This is a financial transaction where the person selling call options owns an equivalent amount of the underlying security. The seller needs to hold a long position in the underlying equity to write a covered call because the shares owned in the equity are the covered part of the call option. This means the seller can deliver the shares if the call option buyer chooses to exercise.

Hypothetically let’s say company XYZ trades at $10 per share and pays a dividend of $0.50 for a 5% yield, and the investor owns 100 shares. The investor sells a covered call at a $12 strike for .08 with an expiration date of 9/1/21. The investor just sold the right to purchase their 100 shares of company XYZ on or before 9/2/21 for $12 regardless of what the share price appreciates to for $8. If XYZ goes to $15 and the option is exercised, the investor who wrote the covered call would only get $1,200 for their shares because they sold the right to buy their shares at $12 on or before 9/1/21.

The downside to selling a covered call is that you’re capping your upside potential. The upside to a covered call is you generating additional income simply by selling the right to someone else to purchase your shares at a specific price on or before a specific date. I like selling covered calls on stocks I want to own long-term, and that trade sideways. I generate additional income from dividend stocks by selling covered calls. Since I own the shares, I don’t see this as being risky because the contract is covered by my shares. XYLD does this for you and pays a much larger yield than you will find from many individual equities in the market. Global X XYLD follows a covered call strategy as it invests in companies throughout the S&P 500 index then writes corresponding call options on the S&P 500. This is an efficient way for investors to gain exposure to income generated from the options market without worrying about doing something incorrectly or spending time learning what to do. XLYD does all of the work as it writes call options on the S&P 500 index saving […]

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