Barry Martin, CFA, Lead Portfolio Manager for Options Overlay Strategies at Shelton Capital Management, joined Keith Black, Managing Director of RIA Channel, to discuss the contrast between index option overlay and actively managed covered call strategies.
Martin notes the increasing popularity of covered call ETFs, which have grown from $1 billion to $100 billion in AUM since 2018.[1] Martin attributes this growth to demographics, as aging investors are seeking portfolios that generate higher cash flow with risk management of downside volatility. Shelton Capital Management offers the Shelton Equity Income Fund (EQTIX) mutual fund, the newly launched Shelton Equity Premium Income ETF (SEPI), and Shelton’s Equity Income SMA.
Equity market volatility drives the income available from options-selling strategies. As volatility increases, the income provided by selling covered calls increases. Covered call strategies generate income by selling the upside potential return of a stock. This income can be spent or used as a risk management tool to dampen equity market volatility.
Rather than investing in a portfolio allocated 60% to equities and 40% to fixed income, some advisors are moving to 50% equity, 30% fixed income, and 20% derivative income strategies. For example, in a recent whitepaper, the CBOE indicates that the hypothetical 60/20/20* has outperformed the traditional 60/40 portfolio in 13 of the past 19 years. Derivative income strategies perform best in choppy, sideways markets, reducing equity standard deviation by about one-third, while offering strong cash flow potential.
Advisors need to differentiate between passive and active covered call strategies. Index option overlay strategies invest in stock market indices and sell equity index options. Active strategies invest in a portfolio of single stocks, while selling single stock options. Shelton Capital Management actively invests in both the stock and options portions of the portfolio. Because single stocks tend to have higher volatility than stock market indices, options on single stocks can have higher prices. An active manager may choose to monetize these higher option prices or sell options further out-of-the-money to maintain higher cash flow while reducing the degree of upside potential that has been sold.
Resources: Should Investors Consider Options-Based Strategies to Help Manage Portfolio Risk?
WEBCAST – Monetizing Volatility: The Case for Active Options Strategies
Today, most traditional covered call ETFs lean on index option overlays or synthetic notes. By contrast, using options on individual stocks within a covered call strategy can provide greater flexibility, monetize volatility and potentially capture more of the underlying equity’s upside. Join Shelton Capital for a dynamic discussion on the ever-growing option-based strategy market and why they can make sense in today’s market environment.
Key Takeaways:
- Harnessing market volatility to seek consistent cash flow
- Beyond 60/40: Using options-based strategies in portfolios
- An overview of Shelton Premium Income ETF
- Why Options on individual stocks
- Key factors to consider when implementing a covered call strategy
Accepted for 1 CFP® / IWI / CFA CE Credit
*A 60/20/20 portfolio of 60% stocks (SPX Index), 20% bonds (Bloomberg US Agg Index), (20% to an Options-Based Strategy) Portfolio. The S&P 500, is a stock market index tracking the stock performance of 500 leading companies listed on stock exchanges in the United States. The Bloomberg US Aggregate Index (or “Agg”) is a flagship benchmark for the US investment-grade, fixed-rate, taxable bond market, representing over $50 trillion in securities. The CBOE S&P 500 BuyWrite Index or BMX is a benchmark index designed to show the hypothetical performance of a portfolio that engages in a buy-write strategy using S&P 500 index call options. One cannot invest directly into an index. Click here for the whitepaper and more details on Option Strategies.
Important Information
SCM Trust has filed and declared effective a registration statement with the US Securities and Exchange Commission for the Shelton Equity Premium Income ETF, which is now listed and trading on the NYSE Arca under the ticker symbol SEPI.
The Shelton Equity Premium Income ETF is distributed by Paralel Distributors LLC, Member Firm. Shelton Capital Management is not affiliated with Paralel Distributors LLC.
SEPI Fund Disclosures
An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. To obtain a prospectus containing this and other information, please call (800) 955-9988 or visit www.sheltoncap.com/sepi. Read the prospectus carefully before investing.
Exchange Traded Funds (“ETFs”) are subject to the possible loss of principal. The value of the ETFs will fluctuate with the value of the underlying securities. ETF Shares may trade at prices above or below NAV. Liquidity isn’t guaranteed, and trading may be halted due to market-wide or security-specific events, delisting, or exchange actions.
Diversification does not eliminate the risk of experiencing investment loss.
The Fund is new with a limited operating history.
The value of the Fund’s equity holdings may decline, sometimes unpredictably, due to broader economic, political, or market conditions not specific to individual companies. Because the Fund is primarily invested in US stocks, its value will fluctuate with overall market movements and may decline during market downturns, potentially resulting in losses. The Fund’s use of call and put options can limit upside potential and increase costs, particularly if market movements render the options ineffective or result in expired contracts without value.
Investments in derivatives may be riskier than other types of investments. They may be more sensitive to changes in economic or market conditions than other types of investments. Many derivatives create leverage, which could lead to greater volatility and losses that significantly exceed the original investment. Positions in equity options can reduce equity market risk, but can limit the opportunity to profit from an increase in the market value of stocks in exchange for upfront cash as the time of selling the call option. Unusual market conditions or the lack of a ready market for any particular option at a specific time may reduce the effectiveness of option strategies and could result in losses.
EQTIX received an Overall Morningstar Rating of 5 stars among 74 Derivative Income funds, based on risk-adjusted returns, as of 6/30/2025. The fund’s three, five, and ten-year Morningstar ratings were 4 stars, 4 stars, 5 stars respectively among 74, 65, and 33 funds. The ETF is not a mutual fund and may not achieve the same result.
© 2025 Morningstar, Inc. All rights reserved. The information contained herein relating to Morningstar: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
The Morningstar Rating™ for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The Morningstar Rating does not include any adjustment for sales loads. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
Cash flow is the money generated or available to distribute to shareholders. Distributions may include option premium, ordinary dividends, interest income, capital gains, or return of capital. Distributions may coincide with a decline in NAV. Distribution levels may vary and no minimum distribution amount can be guaranteed.
Covered Call: A covered call is an options strategy where an investor owns shares of an underlying stock and sells (or “writes”) a call option on that same stock. By selling the call, the investor collects income (called the “premium”) from the option buyer. The “covered” aspect means the investor holds enough shares of the underlying stock to fulfill their obligation if the call option is exercised.
Standard Deviation: A measure of risk and volatility, showing how much an investment’s actual returns deviate from its average return.
Out of the Money: Options are call options with a strike price higher than the current market price of the underlying asset, or put options with a strike price lower than the market price.
INVESTMENTS ARE NOT FDIC INSURED OR BANK GUARANTEED AND MAY LOSE VALUE.
SEPI32
[1] https://www.etftrends.com/hunt-yield-enhanced-income-etfs-thrive-low-upside-market/