How Option-Based Strategies Can Offer Protection

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Investors have enjoyed strong gains in the equity and fixed income markets, but with traditional assets hitting new records, investors are more exposed to greater downside risk. Investors may consider option-based strategies to help mitigate this potential downside and better manage their future risks.

In the next webcast, How Option-Based Strategies Can Offer Protection, Ben Jones, Senior Indices Strategist, Nasdaq; and Rohan Reddy, Research Analyst, Global X ETFs, will highlight various option-based ETF strategies that can help financial advisers diversify a traditional portfolio of stocks and bonds to meet the challenges ahead.

For example, the Global X Nasdaq 100 Covered Call ETF (QYLD) tracks the CBOE Nasdaq-100 BuyWrite V2 index. The ETF offers covered buy exposure to the popular Nasdaq-100 Index (NDX). Suppose you want to maintain your exposure to technology and the wider Nasdaq-100. In this case, QYLD is a great vehicle where it invests in stocks within the Nasdaq 100 index and then writes options on the Nasdaq index at-the-money against the stock portfolio. The option premium received will increase with volatility. This can potentially benefit investors as they will receive a higher monthly dividend and the potential for a larger downside buffer in the event of a market sell-off.

Hedged buy strategies can potentially increase a portfolio during times of heightened volatility. Covered calls allow an investor to be long in an asset while simultaneously writing or selling call options on the same asset.

Traders generally employ a covered buy strategy when they have a neutral view of the short-term markets and only earn income from the option premium. While these buy-sell ETFs may not produce phenomenal price returns relative to larger equity markets, their underlying options strategy has helped them generate outsized returns.

Global X recently expanded its range of option-based ETF strategies to include protection sell funds. For example, the Global X S&P 500 Tail Risk ETF (XTR) seeks to provide passive investment results that match the underlying index, the Cboe S&P 500 Tail Risk Index. This index measures the performance of a protective sell strategy applied to the underlying stocks of the S&P 500 Index.

The ETF Global X Nasdaq 100 Tail Risk (QTR) seeks to provide passive investment results that match the underlying index, the Nasdaq-100 Quarterly Protective Put 90 Index. This index measures the performance of a protective sell strategy applied to the underlying stocks of the Nasdaq 100 index.

The Global X Nasdaq 100 Risk Managed Income ETF (QRMI) seeks to provide passive investment results that match the underlying index, the Nasdaq-100 Monthly Net Credit Collar 95-100 index. This index measures the performance of an option tunnel strategy applied to the Nasdaq 100 Index, using a combination of short call options (sold) and long put options (bought).

In addition, the ETF Global X Nasdaq 100 Covered Call & Growth (QYLG), which debuted last September, tracks the CBOE Nasdaq-100 Half BuyWrite V2 Index. It might sound like a complex name for an index, but QYLG’s strategy is simple. The fund allocates its investments between the Nasdaq 100 and the covered calls.

Financial advisors who want to learn more about an option-based ETF strategy can sign up for the Tuesday, December 7 webcast here.


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