Common Income Investment Pain Points:

• Dividend payments are correlated with company performance, making them inherently unpredictable.
• Bond investment values fluctuate with interest rate changes, creating price volatility for bondholders.

What if there was a way to access income strategies without the complexity?

Enter Covered Call ETFs – a revolutionary approach that makes option-based income-generating strategies accessible to everyday Australian investors through single-ticker investments.

What Are Covered Call ETFs?

Covered Call ETFs are actively managed Exchange Traded Funds that typically combine a core equity portfolio with options positions to seek a specific portfolio outcome such as downside protection, reduced volatility, or enhanced income.

Why do Covered Call ETFs exist?

Traditional Challenge: Implementing options-based strategies traditionally requires market expertise, risk management knowledge, and daily portfolio management—creating significant barriers that place these strategies beyond the reach of most retail investors.

Options-based ETF Solution: Professional fund managers handle all the complexity while you get simple ETF access with:

✓ No options trading account required – trade like any regular ETF
✓ No margin calls to manage – the fund handles all risk management
✓ Professional execution – experienced managers implement strategies at institutional scale

But first, how do options actually work in simple terms?

Before we explore how Covered Call ETFs use these strategies, let's understand the basic building blocks in everyday language:

What is a Call Option?

Think of a call option like a purchase agreement with a future expiry date:

• You have the right (but not obligation) to buy a share at a specific price
• Example: You buy a call option for Rio Tinto shares with 110 Australian dollars strike price
• If Rio Tinto rises to 120 Australian dollars, you can still buy at 110 Australian dollars (making a profit of 10 dollars less the price paid for the call option)
• If Rio Tinto falls to 100 Australian dollars, you simply don't exercise the option (limiting your loss to the premium paid)

How can an option-based ETF generate income?

Instead of buying options, Options-based ETFs sell them to generate income. When you sell an option, you collect the premium upfront but take on the obligation to buy or sell if the other party exercises their right.

How do different Options-based ETF strategies address different investor needs?

Options-based ETFs aren't one-size-fits-all. Different strategies serve different purposes in your portfolio:

Covered Call ETFs - How does selling call options generate income?

This strategy generates income from the option premium and provides a limited reduction in risk but also caps potential profits if the stock price rises significantly above the call option's strike price.

Step 1: Buy the Underlying Shares

The ETF purchases a diversified portfolio of shares (e.g., ASX 200 companies or US tech stocks)

Step 2: Sell Call Options Against

These holdings for each share held, the fund sells a call option to other investors. The fund collects premium income for giving someone else the right to buy their shares at the option strike price.

Step 3: Three Possible Outcomes at Expiry:

• Shares stay below strike price: Fund keeps both the shares and the premium
• Shares rise moderately: Fund keeps premium and benefits from some share price appreciation
• Shares rise significantly above strike: Fund would typically buy back the option position and sell a new longer dated call option.

Note: Please consult the respective ETF PDS for more information.

Real-World Example:

• Fund owns Rio Tinto shares trading at 105 Australian dollars
• Sells call options with 110 Australian dollars strike for 2 Australian dollars premium per share
• If Rio Tinto stays at 105 Australian dollars: Fund keeps shares + 2 Australian dollars premium = enhanced income
• If Rio Tinto rises to 115 Australian dollars: Fund sells at 110 Australian dollars + keeps 2 Australian dollars premium = 7 Australian dollars total gain instead of 10 Australian dollars

What are the main risks I need to consider with Options-based ETFs?

Market and Investment Risks:

• No Guaranteed Returns: Your capital and investment performance are not guaranteed by any organisation.
• Market Volatility Impact: Options-based ETF returns can be significantly affected by individual company performance, sector events, and overall market movements.
• Currency Exposure: International Options-based ETFs may face currency fluctuations between Australian dollars and underlying asset currencies (primarily US dollars).

Options Strategy Risks:

• Derivative Complexity: Options contracts may be difficult to value accurately, and their price movements may not align with expected changes.
• Counterparty Risk: If derivative counterparties fail to meet their obligations, the fund may experience losses.
• Liquidity Challenges: Options contracts may be costly or difficult to exit, particularly during market stress.
• Margin Obligations: Derivative strategies may require additional collateral that could limit the fund's ability to achieve investment objectives.

Credit and Operational Risks:

• Issuer Creditworthiness: Funds face exposure to the financial health of underlying security issuers and their ability to meet payment obligations.
• System Failures: Electronic trading platforms for derivatives may experience technical disruptions affecting fund operations.
• Liquidity Constraints: During volatile markets, it may become difficult to buy or sell fund units at fair prices.