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Using Covered Calls As an Income Strategy Table of Contents

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Using Covered Calls As an Income Strategy Table of Contents Using Covered Calls As An Income Strategy Table of Contents • Finding Income in the Current Macro Environment 2 • Explaining Covered Calls 6 • Option Writing 7 • Covered Call Mechanics 11 • Covered Call Market Scenarios 14 • Volatility 17 • Covered Calls on Nasdaq 100 18 © Global X Management Company LLC 1 Confidential | All numbers are approximate Sluggish Growth OECD’s Economic Outlook 0% o The world’s economy is expected -3% to slow down further if the Covid- 19 situation persists. -6% o Impact of slowdown to affect corporate earnings, lowering equity yields -9% o Industrial commodities expected World GDP Growth to see lower demand over that -6.0% -12% time period o Central banks globally expected to continue easing, potentially -15% extending the low to negative yield environment Source: The Organisation for Economic Co-operation and Development – June 2020. The outlook considers single hit scenario where in no another COVID-19 wave occurs before end of 2020. © Global X Management Company LLC 2 Confidential | All numbers are approximate 2 Central Banks Central banks around the world have maintained easing monetary conditions, pumping money into the economy, often resulting in lower interest rates CENTRAL BANK RATES: Trailing 2 years of Policy Rates (%) Source: Federal Reserve Bank of St. Louis, Bank of England, European Central Bank, and Bank of Japan as of 05/31/2020 2.4 1.8 0.1 1.2 0.05 0.6 -0.05 0.0 -0.6 -0.50 -1.2 Jul-18 Jul-19 Jan-19 Jan-20 Oct-18 Oct-19 Apr-18 Apr-19 Apr-20 Jun-18 Jun-19 Feb-19 Feb-20 Sep-18 Sep-19 Mar-19 Mar-20 Dec-18 Dec-19 Nov-18 Nov-19 Aug-18 Aug-19 May-18 May-19 May-20 United States ECB United Kingdom Japan Central Banks Trajectory US Federal Reserve Fed indicated it will continue to maintain near zero rates through 2022. ECB Expected to further ease in monetary policy to support crisis struck economy. Bank of England BoE slashed its rates to record low of 0.1% in March and launched 200 Billion Pound asset purchase program. Bank of Japan Expected to further ease monetary policy in coming time. China Easing policies in place and expected to continue easing. © Global X Management Company LLC 3 Confidential | All numbers are approximate Negative Interest Rate Environment TREASURY REAL YIELD CURVE RATES: 1 YEAR (%) Source: Federal Reserve Bank as of 06/26/2020 1.2 0.8 0.4 0.0 -0.4 5 YR 7 YR 10 YR 20 YR 30 YR -0.8 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 TOTAL NEGATIVE YIELD DEBT GLOBALLY IN TRILLIONS1 ($) Source: Bloomberg as of 06/26/2020 15 12 9 6 3 0 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 (1) Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index : It measures the stock of debt with yields below zero issued by governments, companies and mortgage providers around the world which are members of the Bloomberg Barclays Global Aggregate Bond Index © Global X Management Company LLC 4 Confidential | All numbers are approximate Interest Rates YIELDS BY ASSET CLASS2 (%) Source: Federal Reserve Bank of St. Louis, Bank of England, European Central Bank, and Bank of Japan as of 06/26/2020 20 15.39 15 10 6.77 5.36 4.23 3.76 5 2.17 2.01 0.64 0 MLPs High Yield Emerging REITS Fixed Rate Corporate Bonds US Equities Bonds Market Bonds Preferreds Yields (%) 10 Year Treasuries S&P 500 SECTOR YIELD (%) Source: Bloomberg as of 06/26/2020 8 6.27 6 3.67 3.53 4 3.01 2.83 2.44 2.35 1.78 2.01 1.31 1.26 1.… 2 0 Energy Utilities Real Estate Consumer Financials Industrials Materials Health Care Communications Information Consumer Staples Services Technology Discretionary Current Yield S&P 500 Yield (2) Asset class representations are as follows, MLPs, S&P MLP Index; High Yield Bonds, Bloomberg Barclays US Corporate High Yield Bond Index; Emerging Market (EM) Bonds, J.P. Morgan EMBI Global Core Index; Corporate Bonds, Bloomberg Barclays US Corporate Bond Index; REITs, FTSE NAREIT All Equity REITS Index; Equities, S&P 500 Index; and Preferreds, BofA Merrill Lynch Fixed Rate Preferred Securities Index. © Global X Management Company LLC 5 Confidential | All numbers are approximate Investor Options What can an income-oriented investor potentially do in low interest rate environments in an effort to increase their portfolio’s yield? A Take more duration or credit risk in the bond markets, like high yield and EM bonds Writing a covered call means an investor owns an underlying asset, B Look for alternative sources of income, such as like a stock or basket of stocks, and high dividend stocks, MLP, REITS or sells a call option on the asset(s). Preferreds. The strategy trades off upside C Consider income-generating strategies, such as participation for current income. covered-call writing © Global X Management Company LLC 6 Confidential | All numbers are approximate Understanding Options What are Options? Options are financial instruments which derive their value from underlying asset such as stocks. They give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date. OurCall HistoryOptions OurPut HistoryOptions • Call Options provide a right to purchase an asset at • Put Options allows holder to sell an asset at certain a determined price in a specified time. price within a specific period of time. • Long Call: Bullish on underlying. • Long Put: Bearish on underlying. © Global X Management Company LLC 7 Confidential | All numbers are approximate Option Writing OurWriting History Call Options OurWriting History Put Options • Writing or Selling a Call Option is when you give the • Writing or Selling a Put Option is when you give the buyer of the call option the right to buy an asset buyer of the put option the right to sell an asset to from you at a certain price by a certain date in you at a certain price by a certain date, in exchange exchange for receiving the premium. for receiving the premium. Determining Option Premium The value of a premium paid for buying a call or put, or received for selling a call or put is determined by five factors: 1) Current asset price, 2) the strike price of the option, 3) Time remaining until option expiration, 4) Volatility of the underlying asset, 5) Risk-free rate © Global X Management Company LLC 8 Confidential | All numbers are approximate Moneyness of Options Out of the Money (OTM) At the Money (ATM) In the Money (ITM) Moneyness of Call Option 170 Out of the Money At the Money In the Money 120 70 20 Strike Price Market Price Lower premiums than ATM or Higher premiums than OTM, but Higher premiums than ATM or ITM options because the chance lower than ITM. OTM because the option can be of the option expiring worthless is exercised for a profit. highest. © Global X Management Company LLC 9 Confidential | All numbers are approximate ETFs & Options ETFs that offer investors exposure to options strategies are becoming increasingly popular, including covered-call ETFs, buffer ETFs, and tail risk-hedged ETFs Common ETF Strategies That Use Options Generates income in exchange for upside Covered Call potential → Gains exposure to stocks in a specific index and sells a call option on that index Provides protection against a predetermined amount of losses Buffer → Gains exposure to stocks in a specific index, sells an OTM call option and buys an OTM put option Provides protection against extreme downside Tail Risk- movements Hedged → Gains exposure to stocks in a specific index and buys an OTM put option © Global X Management Company LLC 10 Confidential | All numbers are approximate Covered Call Strategy A covered call is an option strategy in which an investor writes (sells) a call option on an asset he/she already owns. Covered Call Strategy Payoff Covered Call Features Factor affecting Covered • Strategy involves buying Call Strategy. stocks in an underlying index and then selling • The payoff of a covered Long stock call options on that index call is affected by its • Generates higher income underlying whether it’s a z versus the underlying single asset or a pool of 47 index itself due to the assets in the form of premiums received from Index options. 48 selling call options • Premiums collected are • Upside potential is dependent on the capped in case the stock moneyness of options - appreciates beyond whether the option is strike price. ATM, OTM or ITM – affects the payoff. • Option premiums tend to increase during volatile markets. Out-of-the-money option written At-the-money option written © Global X Management Company LLC 11 Confidential | All numbers are approximate How This Works: Covered Call Strategy In Practice Investor looking to deploy an at-the-money covered call strategy on the Nasdaq 100. Buy all the Components: As per Nasdaq 100 Index NASDAQ-100 Weighting: As per NASDAQ 100 Index Index Components Writes monthly Style: European Call Options on Strike Price (SP): At-the-money the Nasdaq 100 Options Strategy: Written monthly Index Option Close: Third Thursday of each month Index Option Open: Third Friday of each month Additional Info Settlement: Cash settled Expiration: Can’t be closed early, unlike American © Global X Management Company LLC 12 Confidential | All numbers are approximate Covered Call Process Explained As an example of how an ETF can implement a covered call strategy, the Global X Nasdaq 100 Covered Call ETF (QYLD) maintains exposure to the stocks in the Nasdaq 100, while writing call options on the index each month QYLD
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