Invesco Income Portfolio Strategies
- What: Discussion of the CBOE volatility Index (VIX) and the potential benefits of options-based income funds during periods of market uncertainty.
- When: As of the week ending November 17, 2023 (based on the original article's context).
- Why it Matters: Increased market volatility can erode investor confidence and returns.
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Understanding the “Fear Gauge”: The CBOE Volatility Index (VIX)
The CBOE Volatility Index (VIX), often referred to as Wall Street’s “fear gauge,” measures market expectations of near-term volatility conveyed by S&P 500 index option prices.A higher VIX generally indicates greater investor anxiety and potential for market declines, while a lower VIX suggests complacency.The VIX is not directly investable,but traders use VIX futures and options to speculate on or hedge against volatility.
Recently, the VIX experienced its most volatile week as april, signaling increased uncertainty among investors.This volatility can be triggered by a variety of factors, including economic data releases, geopolitical events, and shifts in monetary policy. The VIX frequently enough rises during periods of market correction or crash, as investors rush to buy protective put options.
The Case for options-Based Income Funds
For investors seeking to navigate this volatile landscape, Invesco senior portfolio manager John Burrello suggests considering income funds that employ options-based strategies.His rationale centers on the structural protection these funds offer.
“Options are not reliant on the correlations of stocks with another… asset class,” Burrello explained to CNBC’s ETF Edge. “They can have a more reliable form of downside protection,and also can offer income that’s not interest rate sensitive.”
traditional fixed-income investments,such as bonds,can suffer during periods of rising interest rates. Options-based income funds, however, can generate income through the sale of options contracts, possibly providing a more stable income stream irrespective of interest rate movements.
How Options-Based Income Funds Work
These funds typically employ a “covered call” strategy. This involves selling call options on underlying assets (frequently enough stocks) that the fund already owns. The fund receives a premium for selling these options. If the stock price remains below the strike price of the call option, the fund keeps the premium as income. If the stock price rises above the strike price, the fund may be obligated to sell the stock at the strike price, limiting potential upside gains. However, the premium received helps to offset potential losses.