TLTW teaches an old dog a new trick. The fund holds shares of the iShares 20+ Year Treasury Bond ETF (ticker: TLT) and writes (sells) one-month, 102% out-of-the-money covered call options. The objective is to provide additional income, in the form of option premium, along with the distributions received from the underlying bond portfolio. The fund will write call options up to the full amount of the shares being held in the portfolio. In doing so, the fund takes in option premium but forgoes the upside potential on the bonds at the strike price. The fund uses European-style options, which means the call options can only be exercised on the expiration date. This helps to roll the call options and reduces the chance the fund must physically deliver underlying shares. This strategy may outperform in periods of rising rates and widening credit spreads. In periods of declining rates, the fund will likely underperform as compared to just holding long-term US Treasurys.
