What's better? A covered call options strategy executed by the
individual investor or a covered call ETF or fund that proposes to
do the heavy lifting?
Selling covered calls is a popular investment technique used by
investors with high income or cash flow as their primary goal.
The investor is "covered" because they own the underlying
security or ETF inside their portfolio. And by selling a covered
call, the investor collects premium income from the sale and
effectively caps any potential gains in the underlying security at
the strike price of the call option sold.
Covered Call ETPs
In the ETP market (which includes both ETFs and ETNs), products
that use the covered call strategy are typically focused on one
asset class or category.
For example, the PowerShares S&P 500 BuyWrite Portfolio
(NYSEARCA:PBP) is tied to the CBOE S&P 500 BuyWrite Index.
The fund sells a succession of written options, each with an
exercise price at or above the prevailing price level of the
S&P 500 (NYSEARCA:IVV). Dividends paid on the stocks underlying
the S&P 500 and the dollar value of option premiums received
from written options are automatically reinvested. PBP's annual
expense ratio is 0.75% and it carries a yield near 6.74%.
Another example, of a covered call ETP focused on a single
investment category is the Credit Suisse Gold Shares Covered Call
GLDI sells approximately 3% out-of-the-money notional calls each
month while maintaining a notional long position in the SPDR Gold
Shares (NYSEARCA:GLD). The notional net premiums received, if any,
for selling the calls are paid out at the end of each monthly
Although GLDI carried a yield of 12.32% from its inception date
on 1/28/13 through the end of last year, the note tumbled 31.14%
because of big declines in gold. GLDI has around $22 million in
assets and charges annual fees of 0.65%.
Covered Calls on a Basket of ETFs
My preferred high income strategy is selling monthly covered calls
on a basket of low cost ETFs versus owning covered call funds
concentrated on one asset class. With the first strategy, the
investor controls the length of the trade and the amount of income
they generate. The investor also has the ability to capture
dividend income on the underlying ETFs, which boosts income levels
Our Income Mix ETF Portfolio at ETFguide sells monthly covered
calls on a basket of low cost ETFs. From Dec. 2012 to Dec. 2013, it
generated $9,825 based upon a $100,000 hypothetical all-ETF
portfolio linked to stocks, gold, and real estate.
Are there any reasons for favoring a covered call fund versus
selling covered calls on your own?
If the investor has limited assets and can't own at least 100
shares of an ETF or stock to sell covered calls on, a covered call
fund might be a better alternative.
Also, if you don't feel comfortable executing the covered calls
yourself or you're too busy, a covered call ETF or fund may
possibly make sense. But understand you're not going to get the
same results you could obtain selling covered calls on your
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