Should I Sell Covered Calls to Exit My ULTY Position?

"The YieldMax Ultra Option Income Strategy ETF ( NYSEARCA:ULTY) is a heavyweight when it comes to high-yielders. And while the yield draws many passive income investors in, I'd imagine that many traders are a bit confused as to how to "buy low and sell high." After all, the ULTY has been on a rapid descent since it debuted on the public markets more than a year ago."

"In this piece, we'll look at the case of a trader who owns 25,000 shares, but is looking to form an exit plan by selling covered calls wth a strike price just below where shares currently sit today. Indeed, selling covered calls against the ULTY may seem like a wise idea to boost income further as one gets ready to exit."

"Indeed, selling covered calls against ULTY sounds like a "free ride" of sorts, but it's one that carries a great deal of risk, especially if the ULTY is overdue for a bounce. Additionally, since shares of ULTY are on the descent, the amount of premium one would get from writing covered calls would be relatively muted. Personally, I'm not a huge fan of the exit strategy and would encourage someone keen on exiting to find a level to exit and not overly complicate matters."

ULTY is a high-yield ETF with a supercharged distribution and a rapidly declining share price since its public debut. A trader holding 25,000 shares is considering selling covered calls with strikes just below current levels to generate exit income. Selling covered calls would produce muted premium while shares descend and would cap upside, potentially causing missed participation in rebounds such as an earlier 18% rally. Covered-call writing carries material risk if a bounce occurs. Exiting at a predefined level is a simpler alternative. Large distributions can offset capital losses if they exceed those losses.

Read at 24/7 Wall St.