Equity Option Funds
About Equity Option Funds
Equity options are contracts that give the holder the right to buy (call options) or sell (put options) a fixed amount of a particular stock at a specified price within or at a specified time. The price of an option is called its premium. More volatile markets generally lead to higher option premiums. Listed index options are also standardized contracts. An index call option buyer pays a premium and receives the right to profit if the index exceeds the option's specified index value — the option strike price. The index call option seller receives the premium — and if the index level increases, must be ready to pay the buyer the amount by which the actual index exceeds the specified option index value — the option strike price - on the option settlement date.
Equity option strategies combine investments in a portfolio of stocks with selling and buying options on either individual stocks in the portfolio or on specified stock indexes.
About Nuveen Equity Option Funds
Investing in both equity (stocks) and equity index options, Nuveen's equity option funds seek to provide high current income and capital appreciation potential to help investors secure their investment goals. Each fund purchases a portfolio of stocks intended to substantially match the price movements of the specified indexes. The portfolio manager sells call options on the specified indexes, slightly out-of-the-money, to try to generate premium income and try to provide downside protection in falling stock markets.
The funds generate cash flow from their total return, which includes:
- Dividends;
- Net call option position (call premium received less difference between current and strike price of the underlying asset);
- Stock portfolio appreciation/depreciation, and;
- Expenses.
Index options can help implement the Fund's integrated investment strategies in several important ways. First, listed index options generally are highly liquid, which promotes efficient trading. Second, index options may only be exercised on their expiration dates, which removes much uncertainty about their coverage periods.
Third, index options are settled in cash, rather than by exchanging securities, which reduces trading costs and handling expenses.
| JLA | Nuveen Equity Premium Advantage Fund |
| JPG | Nuveen Equity Premium and Growth Fund |
| JPZ | Nuveen Equity Premium Income Fund |
| JSN | Nuveen Equity Premium Opportunity Fund |
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Who Might Be Interested in Equity Option Closed-End Funds?
The features and investment objectives of these funds might be especially appealing to investors seeking:
- Attractive regular distributions;
- Capital appreciation, consistent with the funds' index option strategy;
- A measure of downside protection in rapidly declining markets.
What are potential risks of equity option strategies?
- Equity option strategies carry common stock risks, including high return volatility and the risk that an adverse event may significantly affect an individual stock.
- Nuveen equity option strategies use index call options, which are settled in cash. The fund cannot provide for its potential settlement obligation by acquiring and holding the underlying securities.
