Q: Hello,
I have been reading up on this fund, and comparing it to other covered funds. This one utilizes a strategy whereby they generate income (currently ~ 11% yield) by writing puts. This fund is currently 75% written puts. My sense is that when this strategy is coupled with a long equity strategy, you still have similar downside (less the premiums you receive via selling the puts), but your upside is capped. Works if markets are not overly volatile and remain range-bound. But I think things could go really wrong quite quickly in a volatile downward trending market. It seems to me that the fund is short volatility, which could cause serious distress in the fund vs writing covered calls.
Have I got this right?
Appreciate your thoughts as always.
I have been reading up on this fund, and comparing it to other covered funds. This one utilizes a strategy whereby they generate income (currently ~ 11% yield) by writing puts. This fund is currently 75% written puts. My sense is that when this strategy is coupled with a long equity strategy, you still have similar downside (less the premiums you receive via selling the puts), but your upside is capped. Works if markets are not overly volatile and remain range-bound. But I think things could go really wrong quite quickly in a volatile downward trending market. It seems to me that the fund is short volatility, which could cause serious distress in the fund vs writing covered calls.
Have I got this right?
Appreciate your thoughts as always.
5i Research Answer:
In theory, yes. In a downturn the fund will have very limited protection and the put premium...