Covered Calls Explained - The Cost of Income
ฝัง
- เผยแพร่เมื่อ 28 พ.ค. 2024
- The covered call strategy is popular online given its ability to generate "bonus income," but it comes with its drawbacks. We'll dive into both the pros and cons with today's video.
00:00 - Intro
02:05 - Covered Call Overview
04:44 - The Pros
05:41 - The Cons
09:16 - Risk-Adjusted Returns
10:48 - Why You Need to Be Cautious
11:33 - Conclusion
DISCLAIMER: This channel is for education purposes only and does not constitute financial advice - Richard is not responsible for investment actions taken by viewers. Please seek out a registered advisor if you require assistance (while Richard is a registered portfolio manager at WDS Investment Management, he does not provide advice through The Plain Bagel, which is not affiliated with his employer).
NOTE: Some viewers have highlighted that in comparing the yield of VOO and XYLD, I used the last-twelve-month yield for XYLD and the 30-day yield of VOO. To clarify, the two are both annual yields (the 30-day figure is annualized, as highlighted by Vanguard on the ETF landing page). Nonetheless, I apologize for the confusion, as it would have been more accurate to compare the LTM yield for both. For reference, the LTM yield for VOO was 1.38% at the time of video posting, compared to the shown annualized 30-day yield of 1.39%.
Understood, but can you explain why the yield for VOO is 1.39% when the screenshot you show at 11:58 shows that it returned 22.83% over the previous year?
@@wilsonli5642 Sure thing - the 22.83% is TOTAL return. YIELD is just the income paid by the investment, whereas TOTAL return includes both the position's yield and price appreciation.
Think of yield as being like the stock dividend, and price appreciation being how much the stock has increased in price.
10:02 "university stats class" I appreciate your overestimation of the intelligence and qualification of the average retail investor
YOLO
But muh TA squiggle bros!
@@tactileslutlook at this unicorn pattern I identified bro 🦄
A lot of people tend to underestimate the downsides of a covered call because its not so visible as the premium you get, great video
It depends how much you paid for the underlying security. For instance, If you bought the stock at $10 and you ride the trend towards $20 while collecting premium 10 times then letting go of the stock once it doubled is not a bad strategy 😉 😮
I did a collar strategy of selling weekly calls with strikes at/near market prices (income) while also buying puts below market (insurance). The idea was to have the stock(s) called away from me each Friday, collect the premium less the premium I paid for the puts. The goal was to find annualized returns above 12%. After four months, I made about the same amount of money as buying and holding the index, so I switched over to that. It [wasn't] worth the time constantly looking for the good deals.
That sounds like a lot of work. I would rather pay an ETF manager and focus on extra revenue income elsewhere. 😅
This is one of the best explanations of covered call etfs. I like the idea of covered call strategy on only a portion of a leveraged fund.
> I like the idea of covered call strategy on only a portion of a leveraged fund.
Why
If you're only selling a few options against your leveraged ETF, then you're not really covered
Be aware, if you leverage a covered call, you risk that it first drops, margin calls you and then rises, resulting in an uncapped loss.
@@alhollywood6486You don't know what covered means lol. It means you hold 100 shares per option contract sold.
I've had friends find out the hard way that covered calls as an ongoing strategy is not all that it is cracked up to be. If the market surges, your gains get capped as your stock gets yanked away. If they market crashes , you lose just a few percent less than just buy and hold. Plus, after eating the big loss, you have less money to buy stocks for covered calls. A friend of mine was crushing it with covered calls from 2005-2007, then when the GFC hit, he lost close to 3/4 of his capital.
I think the best use is when you have a stock that you like, but it has gotten overpriced You can write covered calls. If you get called out, you don't mind because you wanted to sell anyways. If the stock goes down, you got some income to offset the loss on a stock you don't mind owning.
I could see it make sense doing covered calls on overpriced stocks that you're sitting on big short term cap gains for. But otherwise you're better off selling.
Cc is like any strategy just about modifying your risk exposure as you said.
I've seen some advice from someone on r/options that says to only use covered calls on more stable stocks and that you can use this strategy to get out of the position.
@@BestWOTReplayss There is no such thing as a stable stock when the market tanks 30-50%. In the GFC, even blue chip like P&G, Pepsi, Colgate, and J&J went down hard
@@BestWOTReplayss if you sell covered calls on a less volatile stock then you get less for it. There is no free lunch in investing
How did your friend lose 3/4 of his capital doing covered calls during the GFC? If anything he would be making a killing on covered calls. If you are just talking about the paper losses on the underlying stocks, then it doesn’t matter. Don’t sell and he would have been fine after 10 years later.
Richard explains everything so well and doesn't over complicate a topic that doesn't need to be!
Covered calls can be used safely if one intends to get out of the position anyway but have some time before they intend to sell. Selling CCs in the money would effectively be selling it now but getting paid the intrinsic value later in exchange for a premium. Sure, the stock might rise while the contract is in effect, but that's no different than selling now and watching the stock go up without you holding it. You could even sell barely in-the-money CCs to try and squeeze some more premium out potentially multiple times before you finally let the stock go. The point is to put yourself in a position where you're satisfied with either outcome. For me, it's almost a counter-FOMO strategy to get over the mental hangup of selling something you've been holding onto for a long time.
What if the stock falls 20%?
@@IndexInvestingWithCole that's the same risk you have for holding any stock for any time period. But as a consolation prize, your CC is likely out of the money, you get the premium, and you can sell again. And you have lowered your break even price, giving you more leeway for the next CC. All this assumes that you can the time to play around again before you need that money from the stock's intrinsic value. If you don't, then sell a really deep in the money CC so you have more security. Folks will buy those super deep CCs for LEAP options, but those need a few months time at least.
But if you don't have the time or risk tolerance, then just sell it on the market now.
@@IndexInvestingWithCole
Look into ‘rolling out’ the position. You would close out the call and either sell and reap the loss on the equity or short another call. There is a falling knife danger though. And it could take a long time of bag holding and shorting to turn it around. (High tech speculation companies are the worst about this)
When beginning, pick a stock that has stable 30-90 day trends and trades enough options that you’ll get decent executions, And keep reasonable expectations. It is a battle of attrition, shorting out of the money calls and waiting. It will feel like a slow process if you watch everyday.
If you want to sell you either expect the price to go down (so you want to sell now, not later) or you want the money now (and can't wait).
I think I don't understand the scenario you're discussing.
@@ricardoamendoeira3800 there are situations where you can wait a bit like getting ready to take a distribution from a retirement account or making a payment in a few months. That's where selling in the money CCs can work. Again, it's only if you have the luxury of time. They are a minority of situations but they are there.
Good video in general. Not a fan of covered-call ETFs, but big fan of writing calls on the positions I own. Writing calls is for advanced traders/investors. One needs to learn which underlying to pick, how to manage the positions, understand the greeks (there is jargon involved), adjusting your deltas, doing ratios, rolling out etc to be successful. Basically, it requires knowledge, time and energy that most people don't have. But if you do, then the strategy can be a lot more profitable on the long term than simply holding positions.
Here is one example from my portfolio: Bought 400 share of SU in Nov 2022 for an avg price of 46,96 CAD. The stock closed this Friday at 44,58. So far, I have made a profit of 18,09%: 1050.00 in dividends and 3x as much (3125,75 to be exact) in collected premium.
But again, it takes time and knowledge and therefore it is not recommended for everyone.
Well this is good timing. A month ago I sold a CC on VTI exp 2/16/24 $250 strike. Been on a roller coaster all week worrying it’d execute. I did not actually want to sell the position! It did expire worthless, but it’s a lesson learned.
Even if the option gets exercise if you really want back in VTI, immediately look at doing the cash secured put you now have the funds to buy and then you can collect another premium And you have the possibility to get in at a lower price and the premium to even offset any potential loss if it goes lower.
Just roll the option?
You do NOT want to sell an option that you don't want to be exercised, because it EASILY could, especially if it's near the money. Much better to sell an OTM option on PART of a position such that if it gets exercised, you're happy about the overall position.
I like to sell a covered call AND a put on the same stock. One or both of them will expire worthless (especioially when the put strike is lower than the call strike), I can roll the leg that is ITM if the stock doesn't move too far, and worst case, my long position rises meaningfully, OR I get the opportunity to sell another OTM put on a meaningully cheaper stock I want to own more of.
The key thing is TO HAVE A PLAN and to KNOW WHAT YOU'RE DOING. Some books on Amazon are good, and there's lots of decent reviews on option books there.
Great insight, I have been doing calls for a year or so, the pain of missing out on huge upside is never really discussed by those championing call writing. In Nov 22 I bought meta for 130, sold 2 calls at 170 one year out and got crushed as it went up to 400. Yes, I made 8k but missed out on much much more if I just bought and held. You also quite rights point out that all premiums are short term, so get the worse tax treatment, also there is always a fee. I enjoy doing calls and will continue, but ultimately it is bearish in nature. It feels weird when your call goes to zero, you feel like you have won the game, but over that time your equity has possibly taken a hit.......you can't celebrate both outcomes. Regards and thanks for the content
So what exactly happened with META? Were your share called away? Were you not able to roll your covered calls up in strike and out into the future?
@@tonytate2197 yeah mate called away, I rolled out a couple of times from 150 to 170, but they were like a runaway train, I made money but left so much on the table…..ah well, win some lose some
@@tonytate2197 It would have cost him $46,000 to roll his calls up to the new strike...
scroll back up and cover call that like button 👆
… and cover call that subscribe button for info like this?
I've seen the best and worst of this strategy. I wheel calls and puts in my Roth IRA so no worries about tax implications there...but I have definitely been caught on the wrong side of huge moves up and down and have had my share of capped gains and unrealized losses. But it really is amazing to be able to sell calls and puts to the YOLO crowd and know that statistically speaking, you're more likely to come out on top as a seller rather than a buyer. And I have certainly put the premiums to good use. There are large positions in my portfolio that were purchased exclusively with covered call and put premiums. Anyways I acknowledge the risks but overall I've had great success with this strategy.
I really appreciate these videos. I don't do day trading, but it's helpful to understand these concepts to get an idea of who's talking crap and who has reasonable investment advice.
Love the video! I agree that on a numbers game CC ETFs will underperform in the long run. However, I like to view investing through a second lens of personal happiness. With a strategy that focuses on income, you gain more real life options by increasing your cash flow. An example of this might be allowing yourself to take a nice vacation, or perhaps buy something that can be used to increase your happiness on a month you don't wish to DRIP. Instead of going the total return approach and having to wait until you are too old to enjoy your accumulated wealth, you can enjoy life while in good health and with more energy.
This is my philosophy and reasoning for holding CC ETFs. Although, I prefer an ETF that only writes calls on a portion of the fund. That way I to still get some exposure to the upside.
Keep up the great work!
Bang on!! That's exactly my sentiment. Who wants money when they are toooo old to actually enjoy it? What I'm doing is finding cc etfs that have a lower coverage ratio... Ie 33 % to 50% coverage... That way half or more of the portfolio has the potential to grow or perserve the capital all while earing over 10 % monthly paying yield. What's not to like?? Best of both worlds in my opinion. I could care less of the traditional measure of paper gain that can't actually used or lived on until an old age retirement plan.
I totally agree with you. I trade covered calls for a year and decided to stop. It underperform buy and hold for a long shot... there is truly no free lunch out there
I have been following you ever since the start of the pandemic back in March 2020. You never cease to amaze me. Thank you Richard. Sending positive vibes from New Brunswick, right next to the Gaspe!
This is one of my favorite semi-passive methods for income generation. As others have said however, it can flip on you quickly. I recently sold several CCs on my PLTR shares for earnings where I believed the statistical odds of a 30% gain in one week was close to nil..... ended up having to buy to close and eat the difference because it rose around 50%!
Great comment! Have you considered writing a trailing stop on the CC? This would limit your downside. Been there and unfortunately done the same thing.😉
@@juwright1949 I'll have to look into that. Thanks for the heads up. In the end, I was very happy with the outsized gains of my Pltr shares 👌
Rather it flip up 50% than down.
Wait, why did you have to buy to close? Doesn't that mean they were naked calls, not covered calls?
I'm bullish for long term and didn't want to lose my shares with my low cost basis. If the contract was to go in the money, they technically could have been exercised prior to expiration.
Best video so far talking about the cons/tax ramifications. GREAT JOB!
Richard, excellent video. One aspect that you did not address is the decline in value of the underlying stock. Yes, the INITIAL call option will expire and you will earn the premium. HOWEVER the next call option you write will be very difficult because the underlying stock is now trading BELOW your ORIGINAL acquisition price, therefore you must write a strike price at a level higher than your original acquisition cost, the associated option premium will be very small. Basically you want to employ this strategy on a stock that has high volatility within a narrow price band. The strategy works, however watch out for the value trap stock! Excellent videos and channel content. How about one on return stacking! 😉
theyre basically perfect for small cap pharma stocks right before FDA decisions.
I generally only sell a covered call or cash secured puts when I'm largely indifferent to the outcome. The more you need to be able to predict the future to accomplish your goals, the less I consider derivatives a good idea.
Brilliantly explained and to the point. Thank you!
I’ve just recently started using covered calls in my portfolio but I only use them on positions I’m looking to sell as is. I don’t expect these positions are going to drop radically hence why I’m not just selling them outright. I feel covered calls make sense here as I can generate a little extra income but I won’t be mad if I lose my positions
This right here. Use it to get out of positions that you don't think will crash but might flatline. Don't do it on stocks with huge upside or downside
From a value investing perspective, I think it makes more sense to just sell that position and use the capital on a stock you believe to have better future prospects. What makes you satisfied to stay with a company that you don't believe will appreciate in value?
Great video! Didn't know about the distributions being different but that made it click for me why risk is so hard to measure.
Regarding being the house: always thought that point was a bit odd. In gambling the house gets to set its own fees and payout schedule. Whereas with options you're subject to whatever the market sets the premiums at, having to take more risk to get higher premiums.
After cuts from contract fees, PFOF, etc (or bundled as a fund expense) it seems like it'd be more accurate to say it's like a game of poker between two players who each paid a fee to their brokers, market makers, and/or fund managers.
You're still the house. You can choose whether you sell the CC or not. If the rate and schedule is unattractive, you wait. The only real difference here is the casino is only open when the house wants it to be.
@@ZaerkiYou can't consistently sell CC's with a positive expected outcome (statistically speaking), the market won't buy them. So no, you're not the house, unless you being the house is you being a casino that is always waiting for someone to enter but no one ever does.
It sounds more like a player finding an edge over the house rather than being the house.
I mean if someone has a strong reason or some form of insight into mispricing, then more power to them. But unlike the "house" comparison there isn't a statistical guarantee to win in the long term vs buying and holding.
Just looks like both sides paying a small fee to hedge their risk in opposite directions.
Your measured and balance review of material is fantastic.
Been waiting for the covered call video for a while now. Thank you!!
Couple of points missed
1) options can be rolled in future
2) selling puts might be a decent idea for better DCA
Good point. You can fix some of the missed upside by rolling your covered call out and up. But it is not a set and forget strategy. I would say if you start with options you need to understand it is a daily and often multiple times per day job. If you cant do that just stick to buy and hold. Options can go wrong really fast if you are not paying attention and know how to fix a position.
Thanks for an awesome explanation.
I have heard this explained several times and your explanation is the best.
Thanks for covering this. I asked the options reddit if they would play a game where on a dice 1-5 gains a dollar and 6 loses 6 dollars the poll was over 70% yes.
i just keep 75% invested and do cash secured puts at support with the rest of 25%. Cut my loss at 100% of my premium, generally there is a bounce back from support which easily gives 70% PE depreciation. Working like a charm. Don't wait, i waited for 3 years, i wish i had started this early. Don't shy away from cutting your loss in cash secured puts. It works 3 out of 4 times.
Yes, same here. Great strategy, I only write on stocks that I want to own at the strike I want to own them at. Kinda like getting paid to purchase a stock I want to own at a price I want to buy it at. I use CC to exit a position, like getting paid to sell stock I want to sell @ the price I want to sell it at. GREAT COMMENT. 👍🏻
Break it down for a noob, please. Also, what platform do you use/ recommend
Great stuff - thanks, from a former Muni Bond Arb hedge fund dude.
Very clearly explained! I always start with the premise that there is no free lunch - unless someone else is paying.
Thank you Richard for teaching me Covered Calls are never going to be in my circle of competence :)
Thanks for the informative content! Could you make another video explaining the pros and cons of a money market fund? Does it pose additional potential risks compared to government bonds?
excellent introduction to the topic
Thank you Richard! Please do more of these educational videos, it especially benefit the younger crowd that now have access to Robinhood accounts. Ignorance is dangerous but incomplete knowledge is even more dangerous, as it leads to people to confidently make bad assumptions and take risks that can cost them everything.
Great explanation Richard. Ideal is to be able to sell the CC as the IV is spiking on those big days, or roll as far out as you need to to capture that skew if it starts eating up your position. Ideal is not always possible though. The old saying is that it's like picking up pennies in from in front of a steam roller.
I was very tempted by selling put options and then once you are assigned, selling covered calls (and I did a couple). It just sounds so obvious and easy. But once you start doing it, you realize the explanation is hidden in the premiums. I.e. as you've mentioned, you only get any kind of interesting premiums if the stock is volatile / you use strikes no too far away. Also, we say what kind of performance stock / index has p.a. or what's the average over couple of years. But in reality, you see that performance easily in just couple of days and trimming it by selling covered calls is no path to success. So yeah, I agree with the video.
BTW when you think about it:
Selling PUTs = selling insurance against underlying going down
Selling CALLs = selling insurance against underlying going up
Great Video - As a Canadian who has looked into doing covered calls there are several unique issues Cdns need to be aware of (a) the Cdn option market sucks in terms of premiums and liquidity vs the US, (2) Cdn premiums often barely cover the cost of commission and option commission, (c) the Cdn tax treatment on premiums and exercise is different from the US which in turn impacts the liquidity profile of Cdn options throughout the year. To make it profitable you need premium over $1.00 and be able to do it repetitively throughout the year. The return at least in Canada is not there for the work involved.
I hold QYLD, RYLD, SDEM already 4 years and happy with my covered calls investments
One can be happy and still hold a sub-optimal portfolio.
I personally did covered calls on a select high risk investment. The option themselves worked in my favor with the money I generated from selling options (covered calls / buy write/ cash secured put). However the investment themselves have at least at the moment have dropped, resulting in a net loss. In this case I would have been better using the classic invest in basic index funds and ride them out.
While options are useful, normal people should avoid them due to the risks highlighted in the video and the time used to do the pricing correctly. And the market always does things you can not predict.
Great stuff. Enjoy this more technical take a lot.
Excellent video plainbaggel . More should see this
Great explanation - well done!
The wheel strategy is one I see often being pushed at beginner traders, which my understanding is essentially selling calls and puts over and over to slowly build enough premium to be able to make bigger trades.
It seems catered to WSB high rollers who want to risk their college loan money on hitting it big.
It's the way I used to generate some additional revenue while trying to exit my excessive MSFT position to diversify our portfolio. Pulled in a few thousand while eventually having the calls exercised, which resulted in a much more diversified portfolio as I purchased a variety of mutual funds with the resulting cash.
I started using a covered call ETF as my downside protection in place of a bond fund in a Boglehead-style 3-fund portfolio at the start of last year. Haven't run the numbers yet, but I suspect a lot of my gains actually get eaten up by the increased expense ratio
Gained an extra wrinkle in my brain after watching this. Thanks Richard!
Great video Richard, thank you!
I do it sometimes when implied vol seems high or as a natural rebalancer. If the underlying stock is getting very high, the covered call on top of it will be have a higher delta so it was naturally reduce my exposure to that underlying. Easier than selling odd lots to trim.
I just make sure that the covered calls I sell don’t accidentally reduce my overall portfolio exposure to below the level I want. I like to be about 80% exposed to the S&P.
If I spent 100% of my money on SPY and covered calls were at the money, I’d effectively only be only 50% invested - not where I want to be as a younger person with a long time horizon
Would love to see a video on your thoughts about the wheel strategy which uses both calls and puts
Great explanation!! May I request you to make a similar video on selling cash secured puts please 😊 🙏
This was a great video. Thank you
I had no idea what this was, but thx for the info. Ik what to look for
One of my favourite videos on your channel is your how to research a stock.
Can we have a Part 2?
Some companies are overvalued in market price (P/E ratio). In that case, how can we calculate what the reasonable price would be for stocks? Many stocks are too expensive now due to the AI rally. And this question has always been floating in my head.
What price would be a reasonable price for X company?
Would love to hear you make a video for how to make this analysis.
Excellent explanation!
Having not watched the video yet, would it be weird to view cc etfs (JEPI,JEPQ,GPIX,GPIQ) as a hedge in your portfolio? They drop less than the regular market in red days and their yield goes up when volatility rises so your payouts will be bigger. Obviously you don’t expect much growth from these holding but they seem stable
Selling puts may be a better option for many people. Essentially the same thing, writing puts and getting the premium income, but in this instance you would be required to purchase the stock if the the price falls below the strike price. I've been using it to generate income and wait for stocks I like to fall to a price I want to buy at.
In general, it seems like the best use of selling options, be it cash-secured puts or covered calls, is to provide additional income to a traditional buy-and-hold strategy rather than to be the primary source of income. Find a stock you really like and want to hold, get the cash necessary to buy it at a price you like, then sell cash-secured puts with the strike price set at that entry price. Hopefully the price of the stock goes to that planned entry price, thus you buy the shares at that price you wanted while getting to collect premiums for doing something you were going to do anyway. Then once you own the shares, start selling covered calls for those shares set at your planned exit price. The calls and puts you're selling aren't the core of your investment strategy, they're a bonus on top of the buy-and-hold strategy that you're employing.
Thank you mr. Bagel for this grate episode.
Would you make a parallel one on purchasing stock positions through selling puts?
Great idea....I've done a few tradse by writing covered puts and made a little money. I just don't know how to explain it and would love to have Richard explain in layman's terms
It’s the same risks… in exchange for the premium, if the stock actually goes down to the stoke price (AND THEN SOME), you’d be forced to buy it at that strike price despite the fact that it’s kept falling even below that. If you’re lucky it won’t have fallen too much below that.
Great explanation 🎉
I've been doing the wheel strategy with selling cast secured puts, rolling and covered calls for a few years now. It's been nothing short of life changing. You have to be disciplined though, I started off with about 3 rules when selling contracts now I have about 15 that I follow before I sell one. The house does indeed always win....some times lol.
Care to share?
Great vid 👍🏽 maybe cash secured puts next? I know a lot of people market them as a sure fire way of buying into a position at a discount
Great vid. Always good to see honest pros and cons of strategies.
Informative, clear, accessible.
I use a synthetic covered call strategy in one of my paper portfolios. Id be curious on a breakdown of the adjusted risk return on that strategy as it can reduce some of the risk of a covered call. It does require active engagement but has a pretty consistent risk profile.
Many covered call ETF's use a mechanistic formula to selling covered calls. For eample QYLD sells covered calls at the money on a monthly basis. I personally feel that this strategy , while initially generating great returns will ultimately result in a decrease in the dollar amount of returns over time and will also result in a gradually lowering of the ETF price. I would be very interested in your analysis of these covered call ETFs. Thanks so much
Bob
The NAV erodes overtime but you can purchase something like VOO to balance it out
Thank you for your reply Joe. i can only hope that Richard chooses to respond too with useful information.@@joekerr3638
Looks so much complicated but still fun and curious to learn
Great video. It would be awesome if you cover Cash Secured Puts as well!
This is super informative. Thank you.
The best covered call strategy I've heard is to sell covered calls on a stock that you're holding long-term and setting the strike price at your exit price only. If the price of the stock goes down, you have some unrealized losses, but you were planning on holding the stock through those losses anyway, so it doesn't affect your strategy. If the stock hits the strike price and your calls get assigned, well, you were already planning on selling at that price. Either way, the premiums you collect on the covered calls is bonus income on a strategy that you were already going to employ. The worst strategies I've heard involve people buying stocks for the explicit purpose of selling covered calls. That's a recipe for disaster.
Great video super helpful.
Thanks for covering this
I do miss the days of Plain Bagel Co. hahaha
Looking forward to this.
Can you do a video on cash secured puts? Loved this one.
To add: Dividends are priced into options. It brings the cost of calls down and the costs of puts up so it's actually irrelevant if the stock you are trading has a dividend.
Thanks for this video and for explaining things so succinctly! Just as a hypothetical though. If one had been holding a long term position over the years and was planning on cashing out if it reaches a slightly higher price, and they use covered calls at that strike price to generate some additional income while waiting, do you see any downside? I get that the security could go even higher, but if they were planning to trim their long term position anyways, the premium is just an additional bonus, right? Or am I missing something? Also the underlying security (if call is exercised) is also counting as a long term capital gain for taxes, correct?
I always remember from a book about options I read saying that, covered call selling is for shares you don't mind parting.
Great explanation. Could you do a video on split corp etfs as well? (also popular for cash flow-seeking investors)
Thanks for this video. Now I understand why some people are using this strategy (though I still don't approve -I'm extremely conservative with money and investing).
Well, arguably a covered call strategy is more conservative from a risk perspective, since you are in essence selling the potential for large positive gains to do better in every other scenario. Of course, it is not appealing to someone who is conservative more so in the sense of preferring traditional financial inventions over more recent ones that are more complex and harder to get a feel for and trust.
Your Content Stands Out In A Refreshing Way! I Truly Appreciate The Absence Of Background Music In Your Videos, As It Allows Your Message And Personality To Shine Through Without Distractions. Keep Up The Great Work!
With selling covered calls- timing MATTERS. Use the Vix as an indication. Super low vix, good time to sell since there is a higher possibility that stocks might go down at some point. When they do, sell the option.
Also, sell the call at a strike price you are ok with.
Also, you could just roll the call every time and just get a tax write off if you are upside down.
excellent explanation, etill have a few questions though.
1et one being what about "At the money" strategy?
(like Hamilton ETF)
thx and cheers
Great explanation. I'm curious how a covered call ETF would stack up against safer investments like HISA or bond ETFs. Adding a higher expected return with more downside potential. Seems like they could be a reasonable part of a balanced portfolio, especially as you potentially want income generating assets in retirement. Now maybe you'd be better off with more traditional consumer income generating assets like dividend stocks and bonds.
I spent like 4 years thinking I was a genius stock picker while my 401k was just in an S&P sitting and growing. After 4 years I saw I was not a genius and have a schedule to buy an S&P every 2 weeks no matter what is happening. This has been so….much….better….
One thing I've done: selling covered calls in retirement accounts while also selling puts on the same stocks/ ETFs in taxable accounts. By definition, if I'm forced to sell my stocks/ ETFs (and, normally, buy in at a higher price) I've simutaneously seen my short put position make money, i.e., the put has expired worthless and I've kept the premium.
8 or 9 times out of 10, both the short put AND the short call expire worthless, but 10 times out of 10, at least one of them do.
In the wise words of Benjamin...
It's all f*cking priced in! xD
great commentary
So are covered call ETF’s okay as a diversification of an investment portfolio? Basically not as a primary form of long term investment but supplemental as part of an overall portfolio?
The answer from the video seems to lean towards no if you’re a relatively inactive investor but I wasn’t certain if that was the intended message
When to sell a covered call: if you have 100 shares of something that you would like to sell, but don't care when, sell a call on it with a strike price near the market price. Downsides: if the stock drops more than your premium before expiration, it would have made more sense to just sell at the beginning. You could simply write another call, hoping that the premiums keep up with the depreciating value. Also, as mentioned in the video, if the stock shoots up, you miss out on the appreciation, but that is a bit of a wash since you were planning to sell anyway.
Thank you so much for your video, you opened a door for me to earn some passive income in my retirement. I have one question about selling cover call. If I sell a cover call at $10 which expire at the end of next month, from now and the end of the month, if the price goes higher than $10 in the middle of the contract, will my shares be called away on that date or at the end of the month?
@4:37 Needs an explanation.
On the expiration date, if MSFT stock price is less than the call option strike price, the call option wouldn't be executed. Within this case there are two subcases:
(1) MSFT is worth more than $400 (but less than the strike price)
(2) MSFT is worth less than $400 (what you'd originally purchased it for to cover your call option)
Subcase (1) is ideal for you: the call option expires worthless, you retain the MSFT stocks that had appreciated in value, and you keep the $4 premium.
Subcase (2) is slightly worse: you own a depreciating asset but you keep the $4 premium. You have to wait until MSFT rises above $400 to make your next move.
What do you think about the yieldmax ETFs which are some kind of synthetic covered call? Is it like a more leveraged covered call?
I think people who buy a covered call ETF is ok in giving up some % of upside for the monthly income of about 8%-12% per year, while also having some small upside growth in share price/NAV. That said, you raise an interesting idea of creating an ETF which contains the SP500, and disperses ~10% dividend per year by returning dividends, capital gains, and maybe NAV erosion in down/flat years. If there was an ETF that that... essentially uncap the upside, and distribute ~10% per year, then people would run to that product (as long as the fees were reasonable...
thank you so much for this Richard! I think you saw my posted comment requesting for this.
Can't thank you enough! I searched online for so many videos and had so much issue figuring out this concept. I managed to crack it last night by piecing multiple presentations on TH-cam because none of them do a great job in explaining it to a novice like me UNTIL NOW! Turns out had I waited a day longer, it would have saved me that hassle :D
I like to double rake myself. What I mean by that is, I like to Sell Cash Covered Puts on a stock that I am interested in buying, but waiting for the price to come down. Sell a put and collect money if it never hits the strike. If it does, then I dont mind having to take those 100 shares at the strike I set. Then I can turn around and start selling calls on those shares. I like to see it as double dipping :D Also I like to sell Weekly calls, the selling 4 times a month is normally greater than selling just 1 for 30 days. Much more theta decay too with selling weeklies.
Hey @Richard, would you please share your thoughts in selling puts in Stocks you do want to buy anyways as a strategy?
Great video!
Well explained