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Advantage: Covered Calls

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BY: HANS ALBRECHT, CIM®, FCSI®, VICE-PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS

May 1, 2018

SPX implied volatility (VIX) is trading near the highs of the last few years in comparison to regions like Europe. This means SPX option pricing is nice and high. Some of that is for a good reason – the European Central Bank is maintaining a slower rate of easing, a less urgent approach to that of the Fed. We could see volatility pick up overseas as the year progresses – I will be monitoring pricing in the Horizons Enhanced Income International Equity ETF (HEJ) as that happens.

In the meantime, technology option pricing versus broader market pricing is the highest that it’s been in 10 years. So not only are U.S.-listed options expensive, but tech is pricier than we’ve seen in a decade. This is an advantage for the Horizons Enhanced Income US Equity (USD) ETF (HEA) – we have a lot of tech names and we see it as definitely time to play more defensively, or at least expect more truncated runs in those names going forward. Toppy stocks + great option premiums = covered calls advantage!

VXN (technology option pricing) versus VIX (broader S&P500 option pricing)

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Source: Dynamic Vol, from September 29, 2008 to November 29, 2017.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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