What are options?
Options are forward transactions. You buy the right to buy an underlying asset from or sell it to the other contracting party at a fixed price.
-> Differentiation between options
European options: The right of the option can only be exercised on the maturity date.
American options: The right through the option can be exercised during the entire period up to the maturity date.
-> What terms should you know about options?
Strike price: The price that the underlying asset must have reached on the maturity date to prevent the option from expiring worthless.
Premium: The price that buyers of the option pay for the option. It is guaranteed to flow into the pocket of the seller of the option.
"in-the-money": Exercise price < price of the underlying asset
"at-the-money": strike price = price of the underlying asset
"out-of-the-money": strike price > price of the underlying asset
Maturity: The day on which the option expires.
Strike ratio: For example, a ratio of 0.1 means that for each option you may buy/sell 0.1 of the underlying if the option is in-the-money on the expiration date.
Spread: Difference between the bid and ask price. The option is bought at the ask price and sold at the bid price. The ask price is therefore always higher than the bid price. This term is universal on the stock exchange.
Liquidity: How easily and quickly the security can be sold. It is said that the smaller the spread (difference between bid and ask price), the more liquid the security is.
Intrinsic value:
For a call option: price of the underlying asset - strike price.
In the case of a put option: strike price - price of the underlying asset.
However, the value cannot be not become negative so that out-of-the-money options have an intrinsic value of 0. For "at-the-money" options, the formula for put and call options also results in 0, as the price of the underlying asset = strike price.
-> "The Greeks"
Delta: How much the price of the option changes if the price of the underlying asset changes by USD 1. This value is often also understood as the probability of the option being "at-the-money" or "in-the-money" on the expiry date.
Gamma: How the delta changes if the price of the underlying changes by USD 1.
Theta: The theta represents the expiration of the option value. How much does the price decrease the closer today's date gets to the expiration date? This value is higher for out-of-the-money options, as there is a risk of a total loss on the expiry date.
Vega: How the price of the option changes if the volatility of the underlying asset changes by 1%.
Rho: How much does the price of the option change if the risk-free interest rate rises or falls by one percentage point.
-> 4 variants of options
Long call (bullish): You are buyer of a call option. You have the right to buy an underlying asset (e.g. an Apple share) on a certain date at a certain price if the underlying asset is above or at the strike price on the expiry date.
Long put (bearish): You are buyer of a put option. You have the right to sell an underlying asset (e.g. an Apple share) on a certain day at a certain price if the underlying asset is above or at the strike price on the expiry date.
Short call (bearish): You are seller of a call option. When the buyer exercises the option, you are obliged to sell him the shares at the strike price if the option is "at-the-money" or "in-the-money" on the expiration date.
Short put (bullish): You are seller of a put option. When the buyer exercises the option, you are obliged to buy the shares from him at the strike price if the option is "at-the-money" or "in-the-money" on the expiration date.
Loss potential of these options
Long call/put: If the option is "out-of-the-money" on the expiration date, it expires and the buyer suffers a total loss equal to the purchase price of his options. This is no longer the case as soon as there is an intrinsic value.
Loss potential: Total loss of the stake
Short call: The receipt of the premium is guaranteed. The seller holds the shares in the securities account for the term or not. If the shares are not held by the seller, a theoretically unlimited loss is possible. unlimited loss is possible. This is because the seller must deliver the shares to the buyer for purchase at any price when the option is exercised.
Loss potential: Lost price gains or unlimited loss
Short put: The receipt of the premium is guaranteed. When the buyer exercises the option, the seller needs a certain amount of money to buy the buyer's shares in the underlying asset on the maturity date.
Loss potential: The seller buys the shares at a higher price than on the market
-> Explanation of covered calls
A covered call is the sale of a call option (short call) where the seller has the shares physically in the securities account in case the options are exercised by the buyer .
-> What is a covered call ETF?
A covered call ETF sells "at-the-money" call options on the shares of an index and collects the premiums by selling these options to the buyers. These are distributed to shareholders in the case of distributing ETFs or retained and reinvested in the case of accumulating ETFs.
-> What happens if the shares and thus the index rise/fall?
If the shares rise, the index takes the premiums, but does not take the full profits of the shares, as the selling price of the shares is fixed when the call options are issued. If the index falls, the options issued expire worthless and the shares are kept with the premiums.
In the event of a bull market, we therefore miss out on price gains and in a bear market we take the entire fall, but our losses are cushioned by the premiums.
-> Can a covered call ETF ever rise?
In principle, if a covered call ETF never holds shares without being tied to a sold call option, it should never rise in the long term. In other words, the ETF does not increase in price with covered calls. Using the example of a Nasdaq-100 covered call ETF, in order to rise in price, it would have to partly track the long-term growth of the Nasdaq-100 and partly issue covered calls on the shares so that the ETF participates in the price increases of the Nasdaq-100. Otherwise, the only trend is likely to be sideways or down while it pays out the premiums.
-> What determines the return on covered call ETFs?
The higher the volatility of the shares in the underlying index, the higher the premiums for the options and therefore the higher the income. Traders pay more for higher potential returns. Therefore, a Nasdaq-100 covered call ETF has a higher payout than a covered call ETF on the S&P 500.
-> What makes a good covered call ETF in my opinion?
- No large price losses or even long-term gains and acceptable monthly distributions.
- No complete commitment of all shares to options at any time.
-> Which covered call ETFs are there (incomplete list)?
$QYLE (+1.09%) Global X Nasdaq-100 Covered Call ETF
$QYLG Global X Nasdaq-100 Covered Call & Growth ETF
$QYLD Global X Nasdaq-100 Covered Call ETF
$XYLP (+0.5%) Global X S&P 500 Covered Call ETF
$RYLD Global X Russell 2000 Covered Call ETF
My opinion on these covered call ETFs:
$QYLG issues options on only 50% of its shares and holds the other 50% to profit from price increases of the Nasdaq-100. Nevertheless, it offers a dividend yield of approx. 5% p.a. and would therefore be my personal favorite.
$QYLD This ETF has not offered any price appreciation since 2015 and has even made price losses, so it is out of the question for me.
$QYLE (+1.09%) The best-known variant. It offers a fabulous dividend yield of over 10% and has also offered price gains so far. However, it has not yet given me any insight into the extent to which the "TRS CBOE NASDAQ-100 BuyWrite v2 USD" index also holds shares to prevent price losses due to price increases in the Nasdaq-100.
In conclusion, I find this type of passive income very interesting and sustainable, as the distributions are premiums and not company profits, which are dependent on the economic situation.
Thank you for reading :)
