Sunday, November 3, 2013

Covered Call Strategies Protect What?

I have always reasoned that a covered call strategy will for a small premium; provide opportunity for an investor to give away a rising stock and to hold a losing stock.

According to Horizons Investment Management Inc. their HXT Horizons S&P/TSX 60 Index ETF seeks to replicate, to the extent possible, the performance of the S&P/TSX 60 Index (Total Return), net of expenses.

And according to Horizons Investment Management Inc. the investment objective of their HEX Horizons Enhanced Income Equity ETF is to provide unitholders with: (a) exposure to the performance of an equal weighted portfolio of large capitalization Canadian companies; (I assume the HXT) and (b) monthly distributions of dividend and call option income.

Horizons go on to state the HEX will mitigate downside risk and generate income. The HEX will generally write covered call options on 100% of its portfolio securities. Covered call options provide a partial hedge against declines in the price of the securities on which they are written to the extent of the premiums received.

In reality when the two ETFs are displayed an investor may not impressed with the capital performance of the HEX in an “up” market. I can just imagine what this turkey will do in a “down” marke

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