*This article was produced in partnership with JP Morgan Asset Management Australia
Recent stress in the banking sector in the US and Europe, sustained inflation and actions by some of the major central banks have thrown markets into turmoil and left investors uncertain about the future. Some investors are rethinking their approach to generating income. Do you hold onto cash and core bonds, or do you allow risk and volatility while tapping into high-yield markets such as equities?
An uncertain market outlook is making some investors creative and results-oriented1We employ strategies that allow us to maintain our investments through a variety of market conditions while hedging market volatility. Some of these strategies aim to generate income through equity option-based solutions.
One exchange-traded fund (ETF) strategy’s income-seeking approach consists of two building blocks: investing in an actively managed portfolio of defensive US large-cap stocks and selling the S&P 500 index.2 Call Options – Investment managers seek to provide a consistent stream of income from associated option premiums and stock dividends.3This Unique Strategy Aims To Generate A Consistent Annual IncomeFourwith two-thirds the volatility and beta of the S&P 500, distributed monthly2.
Source: JP Morgan Asset Management. For informational purposes only, to illustrate the characteristics of the underlying portfolio and asset class.Five
For income-oriented or total return investors, such equity option-based solutions offer relatively attractive income opportunities.6 across the portfolio. It also serves as an alternative to stocks where investors can sacrifice some of the market’s upside while increasing their income with lower volatility.
Not all options lighting strategyFive made equal.
Some option writing strategies do not consider market timing and these strategies often have investment managers with deep expertise in implementing the options process.
In one unique strategy approach, the Options Overlay consists of selling the S&P 500 Index.2 One month out-of-the-money call option. At the same time, the option resets a portion of the option on a weekly basis to dynamically adjust upside and income to volatility conditions. This approach allows investment managers to better balance income and total return.
Options tend to go higher when volatility increases. Because it is an option selling strategy, it tends to be valued relatively attractively. In other words, we are trying to optimize for the upside of the market and more income.Four.
What are the main considerations for the Equity Premium Income ETF?Five?
1. ETF strategies may not capture all the upside of the market
This strategy is designed to enhance distributable income, including dividends and option premiums. In exchange for an option premium, an investor may give up some of the market’s upside.
One component of this strategy is an inherently more conservative underlying equity portfolio with lower market beta and volatility. If the market goes down, more defensive stocks can help because a high-quality, low-volatility stock portfolio can withstand such volatility.
2. Positioning for various market environments
- falling market – Such conservative stock portfolios seek income to mitigate potential downside
- Sideways or slowly rising markets – seek capital appreciation and income
- rising market – You may miss the upside to your income
3. Variable distributable income
The accrued option premium may vary depending on prevailing volatility. As volatility increases, income opportunities and capital appreciation potential also increase, and vice versa.
Combining careful and disciplined call writing with an active equity portfolio can serve many purposes.7This combination could serve as access to exposure to low volatility equities, a yield-generating complement to credit, or as a building block for a more diversified income-generating strategy.
|What are call options8?|
|How covered calls workTen?|
It provides information only based on market conditions as of the date of publication and should not be construed as an offer, survey or investment advice. Forecasts, projections and other forward-looking statements are based on current beliefs and expectations, which may or may not materialize. These are for illustrative purposes only and are meant to give you an idea of what happens. Given the inherent uncertainties and risks associated with projections, projections or other forward-looking statements, actual events, results or performance may differ materially from those reflected or contemplated.
Diversification does not guarantee investment returns or eliminate the risk of loss.
- It is for illustrative purposes only, is based on current market conditions and is subject to change at any time. Not all investments are suitable for all investors. The exact allocation of a portfolio depends on each individual’s circumstances and market conditions.
- The S&P 500 Index is an unmanaged index that generally represents the performance of large companies in the US stock market.
- An investment manager (portfolio manager) seeks to achieve specified goals/objectives. There is no guarantee that the objectives/goals will be achieved.
- Returns or shipping are not guaranteed. Distributions may be paid out of equity or income or both. Managers try to achieve their stated objectives. There is no guarantee that the objective will be achieved. There is no guarantee that companies that can issue dividends will declare, continue to pay, or increase their dividends. Based on historical observations.
- Source: JP Morgan Asset Management. For informational purposes only, to illustrate the characteristics of the underlying portfolio and asset class.
- Source: “PM Corner: A Conversation with Hamilton Reiner,” JP Morgan Asset Management, data as of April 22, 2022.
- Source: “New Paths to Income: Selectivity,” Allocation Spotlight Series, JP Morgan Asset Management, October 14, 2021.
- Source: “What Are Options?”, The Options Industry Council, January 2023.
- Source: Basic Options Terminology Explained: In The Money, At The Money, Out Of The Money,” Options Industry Council, January 2023.
- Source: “Covered Calls (Buy/Write),” The Options Industry Council, January 2023.
Source – JP Morgan Asset Management (Australia) Limited ABN 55 143 832 080, AFSL No. 376919
All investments involve risk and may lose value. The information provided in this article is general in nature and does not constitute personal financial advice. Created without Before acting on the information, you should consider its suitability in light of your objectives, financial situation and needs. It is important that you consider the adequacy of information and seek appropriate legal, tax and other professional advice before making any decision. Prior to making any investment decision, investors should read the relevant Product Disclosure Statement and Target Market Determination. These are https://am.jpmorgan.com/au.