Offers more downside protection as premiums collected are higher than writing out-of-the-money calls.
As the striking price is lower than the price paid for the underlying stock, any upward price movement will not benefit the call writer since he has agreed to sell the shares to the option holder at the lower striking price. As the premiums received upon writing in-the-money calls is higher than writing out-of-the-money calls, downside protection is greater as the higher premium can better offset the paper loss should the stock price go down. At $45, the call most likely will not get assigned since there is no intrinsic value left in the option.
Beyond this, fund providers are resurrecting a product strategy long associated with closed-end funds — covered-call writing. All three use a distinct methodology when dealing with their covered-call ETFs (% level of call writing on the portfolios; strike prices at which options are written).
Therefore, the maximum gain to be made writing in-the-money calls is limited to the time value of the premium at the time of writing the call. As per the options contract, the trader has to sell the 100 shares of XYZ at the striking price of $45 and so he receives $4500 for the shares sold.
Since the shares did not get called away, the call writer can either sell the shares for $4500 giving him a net profit of $200 for the entire trade or write another call against the shares held.
This involves selling somebody else the option to buy a stock you already own, at a set price, for a certain period.
We found BMO ETFs experience significant success in terms of AUM growth with their Covered Call Banks (ZWB) ETF, while Horizons has the broadest selection of covered-call ETFs. This avoids a structural problem encountered by covered-call writing strategies using closed-end funds, which earlier experienced significant NAV erosion as a result of fixed distribution policies.
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