QYLD a Popular ETF in Stagnant Market

The Global X fund uses a covered-call strategy of holding long positions in an asset and selling call options.

Reviewed by: etf.com Staff
Edited by: Mark Nacinovich

The Global X NASDAQ 100 Covered Call ETF (QYLD) is attracting lots of interest as the stock market and tech-heavy Nasdaq are going nowhere fast. 

In a static market, a covered-call strategy is profitable as it increases income. However, there is no free lunch in any asset as covered-call strategies limit the upside and have considerable downside risk.  

At just over $17 per share on Nov. 17, QYLD had over $7.7 billion in assets under management. The average daily trading volume stands at more than 3.4 million shares, and the fund charges a 0.60% management fee.   

QYLD began trading in December 2013, and although the long-term trend is bearish, QYLD has made higher lows over the past year.  

Covered-Call Strategy 

A covered-call strategy involves a long position in the underlying asset and selling a call option on a share-for-share basis. The term “buy-write” describes buying stock and simultaneously selling call options. 

The strategy results in income from the call option sale. The price of the underlying minus the call option premium received is the downside breakeven of the strategy. Meanwhile, if the price of the asset rises above the call option’s strike price at maturity, the asset is sold at the strike price, limiting the upside to the difference between the asset’s purchase price and the option’s strike price plus the premium received for selling the call option.  

Put Options 

A long asset and short call on a share-for-share basis is a synthetic short put option. Short options limit the upside, and in a covered call, the upside profit potential is limited to the difference between the option’s strike price and the purchase price of the underlying asset plus the premium received. 

If the asset price drops below the original purchase price minus the option premium, there is a dollar-for-dollar loss. On the upside, the profit is limited. Therefore, covered-call strategies yield limited gains and high risk if the asset price falls. Moreover, if the asset price rallies, the investor may be faced with an opportunity loss.   

Range-bound Nasdaq 

QYLD has attracted lots of interest because the Nasdaq-100 and Invesco QQQ Trust (QQQ) have traded in a tight range over the past months.  

QYLD Chart 1

The chart highlights QQQ’s $342.35 to $387.75 range since mid-August. In a sideways market, a covered-call option strategy enhances returns.

Option premiums reflect implied volatility and interest rates. Implied volatility is the price variance the market expects until the option’s expiration. The trading range has caused implied volatility to decline, weighing on the option premium. Meanwhile, the rise in interest rates has offset some of the drop in implied volatility, increasing the option premium.  

QYLD’s Inflows 

The etf.com Fund Flows Tool highlights the popularity of QYLD in the current environment.

QYLD Chart 2 inflows

The Fund Flows Tool shows that over $900 million has flowed into the QYLD-covered-call strategy since the end of last year.  

Popular ETF 

QYLD is a slightly bullish strategy that will perform best in a static market where the QQQ and Nasdaq-100 remain in a tight trading range. A significant move higher will cause an opportunity loss, while a substantial downdraft in the Nasdaq will create an actual loss.   

As a sign that QYLD is extremely popular, the market has been front-running the call sales or covering, influencing options prices. 

The market has been going nuts for QYLD, which tells us the overwhelming sentiment is that the QQQ is going nowhere fast.  

Andrew Hecht is a Nevada-based writer and analyst covering stocks, bonds, foreign exchange, cryptocurrency and raw material markets. He has over four decades of experience in markets across all asset classes, concentrating on commodity markets. Hecht was a senior trader at Salomon Brothers in the 1980s and 1990s, running sales and trading businesses. In 2013, McGraw Hill published his book, “How to Make Money in Commodities."