What is QYLD ? (NASDAQ: QYLD)

Question

What is QYLD ? Please explain it to me. From my understanding QYLD is similar to ETF. But how do they make money ? How can they pay so much dividend ? I read this and still have no idea, can somebody please explain this in beginner level. Thank you

The Global X Nasdaq 100 Covered Call ETF (QYLD) follows a “covered call” or “buy-write” strategy, in which the Fund buys the stocks in the Nasdaq 100 Index and “writes” or “sells” corresponding call options on the same index.

According to Jonathan Molchan, portfolio manager and head of product development for Horizons Nasdaq-100 Covered Call ETF (QYLD), "when volatility goes up, people typically get a little concerned. But a covered call will exhibit less volatility than the broader market."2 Molchan could point to his own ETF as an example of this effect. QYLD sells a monthly, at-the-money covered call on the Nasdaq-100. The income the ETF generates goes up when investors’ fears concerning the index rise.

For investors in QYLD, this creates at least two benefits. First, according to Molchan, "their monthly dividend will increase," and second, "the premium received on that monthly covered-call strategy also serves as a measure of downside protection, for when the market does sell off." A covered call ETF like QYLD creates income from market volatility.

Answer 1

They make money by selling options (covered calls). They sell those "in the money" which means at prices lower than the current price. This means that one gets money immediately but if the prices go up the stock has to be sold at a price below market value.

Therefore, this is not a "normal" ETF on the NASDAQ 100 that will rise when the index is rising. Rather the contrary, this is exhibiting a mostly contrary behaviour as it will lose some money (being forced to sell stocks below market value) when the market rises. There is only a profit potential if the market is moving sideways (and the premium for the option would be higher than the difference between strike and market price). Theoretically this is also the case when the market falls (as nobody will actually exercise the option if they can get the stocks cheaper on the market). However, if markets fall the assets will lose value, so investors lose as well. This is a very special product to bet on sideways movement.