These funds will typically sell (or ‘write’) call options on the stocks they hold.
This earns an immediate premium (a bird in the hand) but gives up the potential future rise in the share price (two in the bush).
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If stocks fall, losses made in the portfolio will be partly offset by the premium received on the unexercised call contract.
In effect, such funds limit their upside in return for a higher yield, and do particularly well when markets move sideways.
Jim Wood-Smith is head of research at Hawksmoor Investment Management
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