Should I Sell Covered Calls to Exit My ULTY Position?

The YieldMax Ultra Option Income Strategy ETF (NYSEARCA:ULTY) is a heavyweight when it comes to high-yielders. And while the yield draws many passive income investors in, I’d imagine that many traders are a bit confused as to how to “buy low and sell high.” After all, the ULTY has been on a rapid descent since it debuted on the public markets more than a year ago. In a prior piece, I highlighted that the stock chart was horrific, but that the supercharged distribution yield more than made up for the brutal descent in the share price.

This trader is looking to exit ULTY 

In this piece, we’ll look at the case of a trader who owns 25,000 shares, but is looking to form an exit plan by selling covered calls wth a strike price just below where shares currently sit today. Indeed, selling covered calls against the ULTY may seem like a wise idea to boost income further as one gets ready to exit.

And given that rallies have been relatively small and short-lived with the ULTY, such a move seems like an easy way to get more income. That said, the ULTY bounced more than 18% earlier this year after hitting $5 and change. Selling covered calls against the ULTY would have caused one to be sidelined from such a move.

Indeed, selling covered calls against ULTY sounds like a “free ride” of sorts, but it’s one that carries a great deal of risk, especially if the ULTY is overdue for a bounce. Additionally, since shares of ULTY are on the descent, the amount of premium one would get from writing covered calls would be relatively muted. Personally, I’m not a huge fan of the exit strategy and would encourage someone keen on exiting to find a level to exit and not overly complicate matters.

Trading high-yield ETFs can be tough to pull off

As long as that distribution is larger than any capital losses, traders and investors will be in the green. However, the big question is whether the yield will stay elevated. And it’s really hard to say, given that the size of the yield hinges on demand for call options (which will affect the amount of premium one will get) on the stocks the ULTY writes covered calls against. Indeed, trading in and out of a volatile ETF like the ULTY can be tricky.

And while many investors can execute a successful trade, I’m more inclined to view the ULTY as a tactical addition to a diversified portfolio. In a prior piece, I highlighted that YieldMax ETFs represent a new class of investment for many investors who may not be all too familiar with options strategies and how they fit into a portfolio.

There’s a lot of yield volatility associated with the ULTY, and it’s like. And for many, it’s too much to handle to justify a position that’s sizeable (let’s say more than 10% of a portfolio). In any case, contacting a financial adviser for a better understanding of how to manage the risks that come with ultra-high income ETFs like the ULTY is the best move.

In any case, YieldMax has a capable management team that’s more than capable of skating towards where the puck is headed next. If the momentum dries up in one corner of the market, management can pivot and write calls against names that would allow for greater call option premiums. 

The bottom line

At the time of this writing, the ULTY’s distribution rate sits at 85.1%. That’s generous, but it could go either way, especially if the markets are dealt a correction and investors across the board lose interest in buying call options. Perhaps the kick-off of the latest rate-cut cycle from the Fed and the rally in risk-on securities bode well for the ULTY’s strategy and its ability to keep the yield elevated.

In any case, I personally wouldn’t sell covered calls against the ULTY as part of an exit plan. Doing so could cause one to miss a sudden ricochet. But, as always, contact a financial adviser as the final green light before pursuing a trade, especially one that entails a great deal of risk.