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Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here. |
Continuing our structured product series, let's start with a few examples of products with an options overlay. We've frequently discussed the growth of these products and their net volatility-dampening effect on the broader market. These equity income products have experienced tremendous growth over the past few years. Today's example is JEPI, $33B AUM.
How it works:
- Portfolio Construction: JEPI holds a portfolio of securities that closely tracks the S&P 500 Index, providing exposure to large-cap U.S. equities.
- Covered Call Strategy: The fund writes (sells) call options on the S&P 500 Index, generating income from the option premiums received. This strategy involves holding the underlying stocks to "cover" the potential obligation to sell if the options are exercised.
- Option Premiums: By selling call options, JEPI receives upfront premiums, which are intended to enhance the portfolio's overall yield.
- Capping Upside: The covered call strategy caps the potential upside returns of the underlying stocks to the strike price of the call options sold. If the stocks rise above the strike price, the fund may have to sell the stocks at the strike price, limiting further upside gains.
- Active Management: JEPI is actively managed, meaning the fund managers can adjust the strike prices and expiration dates of the call options written based on market conditions and their outlook.
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Learn more about the Market Situation Report written by Tier 1 Alpha. |
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