There are remarkable similarities between the options trading market and the real-life casinos, especially in terms of the participants. The vast majority of options contract sellers are big institutions, and the buyers are both institutions and retail traders (regular individuals). It's a pretty rigged game against the retail buyers because the institutional sellers spend a lot of money to accurately predict the strike price and the expiration of their options contracts. Some lucky individuals could win big profits trading the options, just like the few lucky ones in casinos. However, the house always wins over a long time because they have a statistical advantage. Covered Call ETFs are the things you can buy to invest in these professional options selling institutions. You are funding their operations; they price and sell their options to any willing gamblers in the markets and distribute the monthly profits to all the investors.
If you can't beat them, join them.
When do Covered Call ETFs perform well?
Covered call strategies look to make money from collecting the premiums on the call options. The best-case scenario for such a strategy is that the stock prices don't move above the call option's strike price and become worthless. Once the options expire, our options seller we are investing into can sell more call options against the same stocks it still owns. When the price of the stocks doesn't go up or down but trading sideways, that is when our options seller can comfortably milk the stocks it owns by collecting the premiums over and over off of the same stocks.
When do Covered Call ETFs perform poorly?
The worst possible scenario is when the price of the stocks goes down in value significantly, such as during the market crash. Because our options seller still owns the stocks, it still hurts the total value of the ETF despite the profits from the options premiums offsetting the losses a little.
The following worst scenario is when the price of the stocks goes up in value significantly. The buyers of the call options will exercise the options, and our options seller will lose the underlying stocks. We still end up profiting from the appreciated stock price up to the strike price and the premiums collected but probably nowhere close to the capital gains from owning the stocks and holding onto them.
The above chart shows how the price of the Covered Call ETF (blue line) significantly underperforms the simple strategy of just buying the stocks and holding forever for pure capital gains. While the total value of the ETF fails to be competitive, if you have been re-investing the dividends, the actual monthly dividend payouts grow exponentially.
Who are Covered Call ETFs for?
The Covered Call ETF is a fund designed to maximise the consistent monthly income and sacrifice everything else. It is quite an extreme ETF that is perfect for only the fixed income junky like me. Some of these boast the highest annual dividend yield (10% - 12%) among all the dividend-paying ETFs, and they even pay out the dividends every month. This perfectly fits right into the Monthly Cashflow Analysis resulting in ever-larger monthly household profits each month.
Suppose you are an investor who is only interested in maximising the total returns in every possible investment you can make. In that case, Covered Call ETFs aren't for you as stocks tend to go up over many years, and you will be missing out on all the capital gains if you hold Covered Call ETFs. I've already made my case clear why I don't like this approach in my investing philosophy.
What and how to buy Covered Call ETFs?
(These are not financial advice but merely my current holdings at the time of this writing)
Above Covered Call ETFs are one of the highest yielding dividend ETFs.
Those ETFs are not available for investing in the ISA accounts (UK) on all investing platforms. Instead, I had to open a regular investment account with Interactive Broker to purchase these. Of course, this means I would have to pay the tax on all dividends from them.