The top stock holdings in income-based ETFs generally include companies like VZ (NYSE:VZ), PG (NYSE:PG), UNH (NYSE:UNH), HSY (NYSE:HSY), PEP (NASDAQ:PEP), and V (NYSE:V). These are considered value investments with businesses that are mature, have stocks that trade at or below average market volatility, and for the most part are growing revenue at modest rates.  As a result of these companies’ strong position in the market, management has chosen to return a portion of its profits to investors instead of reinvesting in company-specific ventures. Investing in a diversified portfolio of these types of companies is typically relatively safe and suitable for those with a lower risk tolerance, but potential future upside is expected to be limited when compared to smaller growth or technology companies. Income-based ETFs are often good choices for those close to retirement age, but they’re not for everyone.

Many active investors have an affinity for companies with big growth potential and stocks that trade above average market volatility levels.  The tradeoff to investing in growth stocks like TSLA (NASDAQ:TSLA), NVDA (NASDAQ:NVDA), and PLTR (NYSE:PLTR) is that very few of them pay a dividend – a holder of one of these companies is forfeiting a stream of regular dividend payments for the prospect of excess future returns. While “value” stocks tend to have lower volatility and higher dividends, growth stocks have the opposite – low dividends and higher volatility. Option prices are a function of volatility, with higher volatility driving higher option prices and premiums. As a result, you can generate higher yield writing covered calls on growth names versus value investments. While a practitioner of this strategy may be giving up some upside at times, at other times they will be rewarded handsomely for doing so. Everything else being equal, holding a stock with above average volatility and tactically writing covered calls against it creates the potential for both significant price appreciation and yield generation.

Options offer strategic advantages in different market environments, and many professional investors use them to their advantage on a regular basis – even Warren Buffett, king of buy-and-hold value investing, uses them as part of his strategy.  Selling covered calls can significantly enhance total portfolio returns, but structuring and managing these strategies can be tedious and complex. The team at Exceed Advisory has over 40 years of collective professional options experience and can simplify the process for you and your clients. Contact us for a consultation as to how you can use options as an overlay to an existing model portfolio to create your own dividend stream.

IMPORTANT DISCLOSURE: The information in this blog is intended to be educational and does not constitute investment advice. Exceed Advisory offers investment advice only after entering into an advisory agreement and only after obtaining detailed information about the client’s individual needs and objectives. Hedging does not prevent all losses or guarantee positive returns. Options trading involves risk and does not guarantee any specific return or provide a guarantee against loss. Clients must be approved for options trading at the custodian holding their assets. Transaction costs and advisory fees apply to all solutions implemented through Exceed and will reduce returns.