Shelton Covered Call Strategies Selected for LPL’s Recommended List
After the LPL Research Team’s thorough due diligence process, both the Shelton Equity Income Fund (EQTIX) and Separately Managed Account are now available on the 2023 LPL Recommended List.
Covered call strategies can be more than just a tool for managing volatility; they may offer a way to capitalize on it. In the brief video below, Portfolio Manager Barry Martin highlights why the Shelton Capital Equity Income Fund (EQTIX) is uniquely positioned to navigate rising rates and inflation and offers a compelling solution that seeks to deliver a high level of income while insulating the portfolio.
Options Strategies
Strategies for clients’ seeking to manage risk and generate cash flow with options. Potential to profit from trading underlying securities through puts and covered calls.
Fund Objective
The Fund’s investment objective is to achieve a high level of income and capital appreciation (when consistent with high income) by investing primarily in income-producing U.S. equity securities.
The Approach
- The management team builds a portfolio of carefully selected US stocks and writes (sells) covered calls on those positions to reduce overall volatility while adding potential incremental cash flow.
- Equities are selected in each of the 11 sectors to closely replicate the sector weighting of the S&P 500 Index. The Portfolio Manager has a preference for large cap stocks with attractive dividend yields.
- We identify and purchase approximately 30 equities which we believe have the most over-priced call options. We strategically write (sell) those covered calls two to six times per year to generate cash flow in addition to the portfolio’s dividend yield.
Why Invest in the Shelton Equity Income Fund?
- The Fund has paid dividends since 1997
- The Fund’s Trailing 12-month Yield is 9.28%*
- Since 2018, EQTIX (14.69%) has a lower standard deviation than the S&P 500 (18.69%) and the 30-year US Treasury T-Bill (16.52%) (as of 12/31/22)**
Morningstar Rating TM
EQTIX
Received an Overall Morningstar Rating TM of 5 stars among 82 Derivative Income funds, based on risk-adjusted returns, as of 10/31/2023. Important Information for Morningstar® Rating***
Quarterly Dividend Yield (Trailing 3-Year Period)
Investors cannot directly invest in an index. The Shelton Equity Income Fund writes covered calls against securities held in the the fund. Neither the S&P 500 nor the Bloomberg Barclays US Aggregate Bond Index write covered calls and thus can generate a lower dividend yield relative to EQTIX. There are no assurances that we will be successful in reaching the investment objectives. A covered call strategy limits upside potential for stock appreciation and will therefore underperform in strong markets. A covered call strategy does not protect against downside risk.
Fund Information
Shelton Equity Income Strategy
The Shelton Equity Income Strategy serves as a “core equity” strategy within your overall asset allocation program. Our flexibility for your clients’ preferences will help you deliver the personalization your client is seeking.
We seek to increase cash flow and reduce overall volatility by building a portfolio of carefully selected US stocks and writing calls on the stocks held in the portfolio. This process is generally referred to as “selling covered calls.”
Benefits
- 5-7% cash flow, not including the portfolio’s dividend yield
- Diversified portfolio allocation seeking to generate cash flow
- Reduce portfolio volatility while also retaining potential for limited capital appreciation
- Access to the Portfolio Management team
Considerations
- A covered call strategy limits upside potential for stock appreciation and is likely to therefore underperform in strong markets.
- A covered call does not protect a stock from downside risk. The loss for the investor on each position could be the current price of a stock less the premium received for the call option.
- Withdrawals (such as systematic withdrawals as part of an income strategy) may result in a declining portfolio value over time.
- All investments involve risk including the possible loss of principal. There can be no assurance the strategy will achieve its investment objective.
- If securities are called away, substantial capital gain tax could be incurred.
- The sale of stock will produce tax consequences for U.S. taxpayers. Each option transaction also produces a tax consequence. You should discuss with your personal tax advisor how the options transactions and any sales of underlying stock will affect your tax situation. Shelton Capital Management does not provide tax advice.
Process
Our team selects a diversified portfolio of large cap blue-chip equities, all of which are selected based on in-depth fundamental analysis. Portfolio sector weightings are designed to be similar to those of the S&P 500, to avoid sector concentrations. On these carefully selected US stocks, we seek to fully write the portfolio to reduce overall volatility while adding incremental cash flow. The number of stocks may range between 30 and 50 depending on the size of the portfolio.
| Distilling the Equity Universe | |
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We start with the S&P 500, a universe of widely held large-cap US stocks in the industrial, transportation, utility, and financial sectors which are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor’s. |
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Applying fundamental analysis, stocks are ranked using third-party research, which include factors such as the 10-year trend of relative earnings and prices, recent earnings, price changes and earnings surprises. |
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Using an additional fundamental screen, stocks are filtered by a variety of criteria, including free cash flow yield and price to sales ratios. The highest ranking equities are then selected in each of 11 sectors to closely replicate the sector weightings of the S&P 500 Index. The Portfolio Manager has a preference for large-cap stocks with attractive dividend yields. |
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Finally, we identify and purchase roughly 30 equities which we believe have the most over-priced call options. We strategically write (sell) those covered calls two to six times per year to generate cash flow in addition to the portfolio’s dividend yield. |
Strategy Information
FAQs
Yes. Some investors don’t want to add further concentration of stocks they may already own elsewhere in their portfolios. Others prefer to avoid stocks that don’t fit socially conscious or other criteria. We honor these requests.
Compared to owning the underlying securities outright (without overlay), Covered Call Writing may limit upside potential for securities appreciation. If securities are called away, substantial capital gain tax could be incurred. Option overlay strategies do not protect a security from downside risk. Investors could lose up to the full current price of underlying securities, less option premiums received.
The proceeds are reinvested into a replacement security as determined by the Portfolio Manager.
Yes, if Shelton Capital believes these stocks fit the objectives of the strategy and provide option-writing opportunities, existing positions can be transferred to a strategy.
Insights and News
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Video: Using Volatility to Trade |
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Article: Options Strategies – A Port in the Market Storm |
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Shelton Options Strategies Webinar |
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Podcast: Barry Martin Joins Investing Evolved |
Management Team
Steve Rogers
Barry Martin, CFA
Nick Griebenow, CFA
Jason Goldenberg
Contact Your Director of Advisor Services for More Information
We have a team of professionals dedicated to supporting the needs of our advisor clients. Request to consult with a Portfolio Manager and your Director of Advisor Services to learn more about how we can help you meet your clients’ needs.
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Important Information
*Morningstar as of 10/31/2023
**Risk is defined as standard deviation calculated based on total returns using monthly values. This time period was chosen because EQTIX changed to the current strategy in 2018.
***The fund’s Morningstar three-, five-, ten-year ratings respectively, 4 stars, 4 stars, 5 stars among 82, 74, 33 funds.
Options involve risk and are not suitable for everyone. Prior to buying or selling an option, your client must receive a copy of characteristics and risks of standardized options. Copies of this document may be obtained from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500, Chicago, IL 60606 (1-800-678-4667).
Any strategies discussed, including examples using actual securities’ price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement or recommendation to buy or sell securities. You should review transaction costs, margin requirements and tax considerations with a tax advisor before entering into any option strategies. There are management fees and other charges associated with the Shelton Separately Managed Account programs.
Fund information is not intended to represent future portfolio composition. Portfolio holdings are subject to change and should not be considered a recommendation to buy individual securities. The Fund is subject to several risks, any of which could cause the Fund to lose money. These risks, which are described more fully in the prospectus, include stock market risk, economic and political events risks, sector risks, large and medium sized company risks and value investing risks.
Investors should consider a fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about the fund. To obtain a prospectus, visit www.sheltoncap.com/ or call (800) 955-9988. A prospectus should be read carefully before investing.
Shelton Funds are distributed by RFS Partners, a member of FINRA and affiliate of Shelton Capital Management.
INVESTMENTS ARE NOT FDIC INSURED OR BANK GUARANTEED AND MAY LOSE VALUE.
