Investors who focus on growth often invest heavily in the Information Technology sector, which tends to experience wider peaks and valleys than other market segments. These peaks can occur more frequently in line with long-term economic growth and can be a primary reason why some investors outperform their benchmarks. After these peaks occur, using a strategy to protect assets or generate returns can set a portfolio apart.
An example of such a strategy is systematically writing covered call options, which can create a stream of income when capital appreciation potential may be limited. The premiums received from these options can be reinvested to support future growth and cushion against market declines.
The Global X Information Technology Covered Call & Growth ETF (TYLG) is one such strategy that writes call options on 50% of its notional holdings monthly and distributes the lower of half its premium received or 1% of its NAV, while reinvesting the balance of the premium back into the fund.
In 2023, the Information Technology sector was a key driver of U.S. economic growth, with many of its leaders establishing new 52-week high stock prices. However, some investors may be concerned about stretched valuations. Option premiums can be reinvested to add dimensions to total return potential and support growth-oriented accounts.
Writing covered call options against existing holdings can cap upside price potential while creating an opportunity to limit variability in a portfolio to the downside. By reinvesting premiums, a growth-oriented investment strategy can be supported, potentially resulting in less-widely oscillating patterns of price returns.
The Global X Information Technology Covered Call & Growth ETF (TYLG) writes calls on 50% of its notional holdings and can be paired with long holdings in the constituents of the S&P 500 Information Technology Index. This can potentially provide less-widely oscillating patterns of price returns while only losing a few basis points in overall performance by investing premium distributions into an uncovered position.
Overall, investors focused on the Information Technology sector can utilize strategies like covered call option writing to generate income and maintain exposure to the sector while potentially limiting volatility. ETFs such as TYLG offer a way to create exposure to covered calls while maintaining upside potential associated with the Technology Select Sector SPDR Fund (XLK).
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