Buy write strategies offer investors an opportunity to generate income if they expect markets to move sideways or drift down. 2 existing and 4 new ETF's listed on the ASX provide some opportunities for Australian investors.
If you think markets are going to trade quietly sideways or slightly down over the next few months then Buy Write strategy ETF's might be for you.
A Buy and Write strategy is one where investors hold the underlying shares and sell call options against those shares. For instance if I hold BHP shares currently trading at $44.30 I might be able to sell a $45 call option over BHP which expires in June this year for about $1.00. So I receive $1.00 today but in June if BHP is above $45 the call option will be exercised and I will have to sell BHP to whomever bought the call option for $45. If I was going to hold BHP anyway then if BHP is less than $46 ($45 plus the $1.00 income) then I have done well. If BHP is above $46 then I have sold my BHP too cheaply. If BHP is a lot lower than $45 then clearly I would have been better to just sell my BHP (ignoring tax of course). Selling call options against your holdings (a buy write strategy) gives a bit of income especially if you think markets are drifting sideways or slightly down but you don't want to sell the underlying holdings. Of course if you dont already own the underlying shares then the risk is that you buy BHP sell the call option and the $1.00 income you receive is not enough to compensate you for a falling share price. BetaShares and now Global X have listed a few Buy Write ETF's which are interesting. If you are looking for a sideways movement over the next few months then these ETF's could be for you.
A number of these are brand new so it is difficult to predict performance buy UMAX and YMAX have been around for a while. Comparing UMAX and IVV (S&P 500 ETF) the current dividend yield of IVV is 1.3% whereas UMAX is 6.5%. Over 12 months total return UMAX is slightly higher at 12.5% but over 3 and 5 years IVV has a higher return.
The ETF strategies offered by BetaShares, Global X and Perpetual are over the S&P500, the ASX 200 and the NASDAQ100.
YMAX from Betashares holds the top 20 companies on the ASX and then sells rolling at the money call options against that holding. Similiar to the example above they are holding BHP, selling the call option and then when expiry is close they buy back the call and sell another in a further out month. In the example above June comes around and so they buy back the $45 call (expensive if BHP has gone up and cheap if BHP has gone down) and sell maybe a September call option. They do this on all top 20 companies on ASX.
UMAX also from Betashares holds the S&P500 index or an ETF that holds the index and then sells index call options. So rather than sell calls over the underlying shares of the index UMAX sells calls over the index. The calls as per our example above are usually at a strike price just above the current share price and an expiry of about 3 or 4 months.
AYLD from Global X holds the shares comprising the ASX 200 and then sells call options over the ASX 200 index. In this case Global X says they are following an index - passive strategy that dictates they sell at the money options each quarter and buy them back the day before expiry.
QYLD from Global X follows the same strategy but over the NASDAQ 100. They hold the constituents of the NASDAQ 100 and then sell at the money call options each quarter over the index not each constituent. They buy those back the day before expiry and and sell again 1 quarter further out, thats the "roll".
UYLD from Global X does the same thing but over the S&P 500 index in the US.
JEPI Issued by Perpetual Trustees and managed by JP Morgan buys a JP Morgan S&P 500 ETF and sells calls on the index against the holding.