Options trading provides a way to earn additional income. At the same time, learning to maximize income from options means taking the time to learn about various options strategies and of course, managing risks. Similarly, exchange traded funds, or ETFs, offer important advantages over managing several individual stocks.
ETFs that combine owning stocks with trading options can enhance the upside of both ETFs and options trading while mitigating some of the downside. Why an ETF with options isn’t completely like allowing traders to have their cake and eat it too, they can provide a simpler way to enjoy income, growth, and often both — all while automatically diversifying to reduce risks. Take a few minutes to understand how ETFs with options work, plus see some good examples of popular funds.
How Do Option-Trading ETFs Work?
An ETF holds a basket of various securities. This allows investors to diversify for a lower cost than they would pay if they tried to buy all of these shares of stock on their own. Otherwise, ETFs trade pretty much like any other stock, with tickers, fluctuating prices, and the ability to buy and sell them during the course of a trading day. In fact, you can even buy or sell options on many ETFs on your own, just as you can with typical stocks.
Trading options on an option-trading ETF should appeal to people who really like to have some options with their options. Instead of simply holding securities, an ETF with options will also use various options strategies to achieve its objectives. Most commonly, the fund will sell covered calls to earn income; however, some also use puts to guard against market downsides.
Examples of Popular ETFs That Use Both Securities and Options
OptionsPie.com never suggests buying one kind of security or another. Likewise, consider this discussion of popular funds simply a way to illustrate some popular examples. As always, investors should do their own research before investing their own hard-earned money.
QYLD: Global X NASDAQ Covered Call ETF
QYLD gets a lot of attention as an income-producing ETF. This fund invests at least 80 percent of all assets in securities, such as Apple, Microsoft, and Amazon. The fund can earn money from growth and possible dividends. To produce extra income, they sell call options.
The stock has a good track record of paying substantial monthly income but isn’t usually considered a growth vehicle. As its intended to focus on producing income, the share price doesn’t fluctuate much. Investors can enjoy growth by reinvesting their dividends back into the fund, and most trading platforms have a way to automate this process.
NUSI: Nationwide Risk-Managed ETF
When it comes to generating income, QYLD has performed pretty well during most periods. At the same time, during market downturns, the share price and associated dividends have temporarily reflected the unfavorable market climate. NUSI employs active management and uses a combination of covered calls and sold puts to provide investors more protection against drops.
In other words, investors in NUSI sacrifice some upside potential for asset protection. Like QYLD, the fund focuses on protection, so the share price generally doesn’t change too much.
Are ETFs That Trade Options the Best Kind of ETF for Everybody?
While exercising an options strategy from within an ETF can improve income, it also carries some risks. For instance, if the market rises unexpectedly, the fund might get their calls exercised, so they will have to sell some stock and perhaps, need to buy it back at a higher price. Like spending money to buy puts to cover downside, trading options can sometimes limit the upside. That’s why most of these funds focus upon dividend income over growth. Investors who want to focus more upon growth might look for funds that emphasize growth or employ different methods to keep dividends high.
Also, while ETFs can offer investors the advantages of diversification, professional management, and managed risk, their are also downsides of ETFs to consider. For instance, ETFs can make it easier to diversify, but this might still be a limited diversification. As an example, the ETFs mentioned above hold only large-cap, US stocks and not other classes of equities. Finally, while it’s possible to independently trade options on many options-trading ETFs, their options charts usually aren’t very active with the sort of volume that experienced traders generally seek.
In summary, most investors turn to ETFs that sell covered calls or buy puts for income, some diversification, and asset protection, they may look for a growth fund or stock to more rapidly increase overall value.