The VGT stock split made covered calls far more accessible. Investors now need roughly $11,200 instead of over $80,000 to sell one covered call contract.
Covered calls can turn unrealized tech gains into retirement income. Selling options against VGT allows investors to collect premiums while potentially trimming positions gradually.
There is no free lunch. Covered calls generate income by giving up some upside participation, and option premiums are still subject to trading commissions, bid-ask spreads, and taxation.
The analyst who called NVIDIA in 2010 just named his top 10 stocks and Vanguard Information Technology ETF wasn’t one of them. Get them here FREE.
The analyst who called NVIDIA in 2010 just named his top 10 stocks and Vanguard Information Technology ETF wasn’t one of them. Get them here FREE.
I think the Vanguard Information Technology ETF (NYSEARCA: VGT) is the poster child for why investors should let winners run. If you were able to hold this ETF through the sizable volatility that comes with a concentrated technology sector investment, you would have earned a 24.09% annualized return over the trailing 10 years.
The ETF became so successful that Vanguard recently implemented an 8-for-1 stock split, reducing the share price to a much more manageable roughly $112 as of May 19. Importantly, the split itself changes nothing fundamental. The underlying holdings did not suddenly become cheaper. The ETF’s valuation metrics, expense ratio, and 0.36% 30-day SEC yield all remain exactly the same.
Still though, for retirees sitting on substantial unrealized gains in VGT, the split did make one thing materially more accessible: selling covered calls. That matters because many long-term VGT holders may not want to liquidate their shares outright and trigger large capital gains taxes, even at favorable long-term rates. But retirement still requires cash flow, and VGT’s dividend yield alone is unlikely to provide enough income.
The stock split lowered the capital required to implement options strategies on the ETF, making covered call writing accessible to many more investors than before. Here is how that works, along with an example using the recent option chain data for VGT.
What Is Selling Covered Calls?
A covered call strategy is fairly straightforward. You own at least 100 shares of an underlying stock or ETF and then sell a call option against those shares. The buyer of the option receives the right, but not the obligation, to purchase your shares at a predetermined strike price before expiration.
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