How to Improve the Yield on Long-Term IWDA Holdings
By Koen Hoorelbeke, Investment and Options Strategist
Introduction
The iShares Core MSCI World UCITS ETF (IWDA) is a popular choice for long-term investors seeking exposure to global equity markets. Traditionally, investors have simply bought and held IWDA to benefit from market compounding. However, recent developments allow for additional income generation through mini-options on IWDA, enabling covered call strategies on smaller ETF positions.
Why IWDA is a Core Holding
IWDA tracks the MSCI World Index, which includes large and mid-cap companies from developed markets, providing broad diversification. Many investors treat it as a foundational element of their portfolios, focusing on long-term growth rather than short-term fluctuations.
Introduction of Mini-Options
Traditionally, options on ETFs required a minimum of 100 units, making it impractical for smaller investors. The introduction of mini-options on Euronext Amsterdam allows for contracts representing just 10 ETF units, making covered call strategies accessible to a wider range of investors.
Practical Example of Mini-Options
For an investor holding 40 units of IWDA, mini-options allow them to sell call options on smaller increments (10, 20, or 30 units), providing flexibility in managing their positions. Larger investors can also benefit from this flexibility, allowing for staggered strike prices and expiries.
Understanding the Covered Call Strategy
A covered call involves owning the underlying asset and selling a call option on it. The seller receives an option premium in exchange for granting the buyer the right to purchase the asset at a predetermined strike price. This strategy generates income but limits potential gains above the strike price.
Illustrative Example
Assuming IWDA is priced at EUR 112.60 with a call strike price of EUR 115 and an option premium of EUR 1.35 per unit, an investor selling a mini-option contract (10 units) would receive EUR 13.50 in premium. This represents a yield of approximately 1.2% for one month.
Profit and Loss Analysis
Maximum Profit
The maximum profit occurs if IWDA finishes at or above the strike price at expiry, combining capital gains and the option premium.
Maximum Loss
The maximum loss is similar to owning the ETF, with the option premium providing only a small buffer against declines.
Possible Outcomes at Expiry
If IWDA remains below the strike price, the option may expire worthless, allowing the investor to keep the premium. If it rises above the strike price, the investor may have to sell the ETF units at that price, missing out on further gains. The premium received offers limited protection against declines.
Final Thoughts
Mini-options on IWDA enhance the accessibility of covered calls for a broader range of investors. While they do not introduce a new strategy, they allow for more precise management of ETF positions, potentially improving yield while maintaining exposure to global equity markets. Understanding the mechanics and trade-offs is crucial before implementing these strategies.