Monetizing Volatility: Inside the Shelton Equity Premium Income ETF

**SPEAKER_1** (0:00)
Okay, it's time for our ETF watchlist segment. Joining me right now, Barry Martin, Portfolio Manager, Shelton Capital. And we're looking at SEPI, Shelton Equity Premium Income ETF. And this is something different. Let's talk about this. You're looking at individual stocks. Explain a little bit about SEPI.

**Barry Martin** (0:21)
Yeah, what we're doing is actually generating additional cash returns by monetizing the volatility of the underlying positions. And we do that by selling covered calls. Yeah, so we sell covered calls on individual positions across the 11 different sectors.
And basically, each underlying holding has a covered call written on it.

**SPEAKER_1** (0:41)
And so with that, the thing that makes this so different too, in my opinion, is that we don't normally see this in this way. There's no indexes. In fact, it has less volatility than the S&P itself, right?

**Barry Martin** (0:55)
Yeah, I mean, you'll see like, we're in the derivative income category, and it's become, as you know, quite popular. I think about 52 billion was raised last year in the derivative income category. And most of those people and our competitors are selling index calls.
And so what we've noticed in the market is actual index volatility has been fairly low, but individual volatility on the individual names is higher. So that benefits us in a couple of different ways. One, we can write calls that are tighter and take more off the table when we sell calls that are close to the money, or we can sell further out of the money to hit our target cash flow yield.

**SPEAKER_1** (1:35)
So to what do you attribute the recent gain that you're seeing in SEPI now? Over six months, it's about almost 10 percent. Specifically, were there certain trades or certain market trends that helped to move this higher over the six months?

**Barry Martin** (1:51)
Yeah. So we're equally weighted to the SMP. So we don't make any sector bets. But what we believe we're buying is the best stocks in each sector to sell covered calls on.
Obviously, the market with the AI winners have helped out dramatically. And also, it really comes down to the volatility of these underlying positions.
So when volatility is low, it's harder to write calls because you don't get the upside. Now we're selling calls that are generally close to 10 percent out of the money, anywhere between 30 to 60 days out. So now you're kind of getting the best of both worlds. The win's really at our sails is that we're getting the upside of the underlying equities. Plus, we're getting the cash flow for selling the option premium. So right now, the market's been really good. And we see that in the foreseeable future.

**SPEAKER_1** (2:38)
When we think about earnings season, and you're saying how you're picking individual stocks out of each sector, maybe the best of the bunch, and we saw big moves, 15 percent, 20 percent, 25 percent. That's the environment that's perfect for you, right? And do you expect that to be in the next earnings season too?

**Barry Martin** (2:57)
Yeah. I mean, right now, obviously, we have the great earnings quarter. I think it was the best since 2021, Q4. And will that continue? Hopefully so. But the thing is really the unknown of that and the ball of underlying equity. So we really don't make necessarily equity bets because we're a well-diversified portfolio, and we have all 11 sectors. But we're really trying to generate alpha on that option premium. That's where the volatility is, especially around earnings. So volatility tends to pick up around earnings, and we'll take advantage of that by selling those calls. As I mentioned earlier, typically we're selling calls right now about 10% of the money.
Where the strategy underperforms is if the market and the underlying equity goes past that 10%, but since there's so much volatility, we're able to roll those options. So if it goes in the money, we'll likely buy the option back and sell another one. So we're really active on both the underline equities and we're active on the option side as well. So it's active on both sides.

**SPEAKER_1** (3:55)
And I know that we're having a record ETF year. I'm sure you expect that to continue. I'd love to hear your thoughts. And just a final thought on the size allocation that people should have, or what suits a client's portfolio as an example that you could give us.

**Barry Martin** (4:11)
Yeah, I mean, it's been a great year, especially the derivative income. And I think that a lot has to do with demographics. We have, Wall Street Journal calls it a boomer candy. And that makes a lot of sense because people are looking for yields without taking credit or duration risk. So they're moving to products like this. So we're seeing growth over the last couple of years, and we'll see that in the continued future. So we're really, really happy about that.