FEPY
Fidelity Equity Premium Yield ETF
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Diversify your investment opportunities with a call writing strategy that aims to provide monthly cash distributions, capture market upside potential and reduce portfolio volatility.
Covered call strategies are a time tested
solution that combines a long
equity allocation
with short exposure to a call
option. The strategy has
historically appealed to investors who
seek to maintain some portion
of equity upside potential,
they wish to generate an
elevated level of cash shield,
and they wish to dampen
overall portfolio volatility.
In the Fidelity Equity Premium Yield ETF,
we incorporate an index-based covered
call strategy
and we use this strategy to produce
an elevated level of cash
flow and also a dampened
volatility experience.
An index-based
covered call strategy significantly
reduces the operational and
implementation complexity relative
to a single stock option
implementation.
And I think that there's several important considerations
particularly from an operational and
a risk management perspective.
Speaking specifically to the operational
perspective first.
An index-based covered call strategy
will dramatically reduce the number
of option holdings we have in the portfolio.
For example, let's take
a look and and pretend that we're working with
an equity portfolio that has 200 individual
equity holdings.
A single stock covered call strategy would
require us to sell
approximately 200 single
stock option positions. So we would effectively
double the number of securities
held in the portfolio.
So when you think of that, compared to an
index-based covered call strategy,
where we are required to sell as few
as one option to cover
the entire equity portfolio, there
are tremendous advantages
in the number of positions
that we have to monitor. There
are a significant
reduction in the trading complexity,
in collateral management and certainly reporting.
So for these reasons,
you know, from an operational standpoint,
we have a strong bias towards index
based options for cover call strategies.
Now let's talk about risk management. So
job number one in portfolio management
is you are a risk manager every minute
of every day, and so we
think an awful lot about
liquidity, transparency
and our ability to trade, not in the
best markets, not in a normal market environment
but in the absolute worst market environments.
And so
with that background in place, the
Fidelity Equity Premium Yield ETF exclusively
uses listed S&P 500
index call options as part of our call selling strategy.
We favor these securities because an interesting
statistic is that, roughly
$800 billion of
average daily volume, in notional terms,
trade every single day in this contract. So it's
very, very liquid even in
the most challenging markets like we saw in 2008,
2018, 2020 et cetera.
So
liquidity is paramount to the day-
to-day activities and the portfolio management
side of these things, but it's absolutely
vital in the periods where we need it most.
So we think that this is a differentiator with
our product. Managing risk is a key
attribute to our portfolio management
process in the Fidelity Equity Premium Yield ETF
and our decision
to incorporate index-based
covered call options underscores
our commitment to the operational efficiency
and our focus on risk management within
the fund.