MFOHome About Commentary Discussions Funds The Best Resources Support Us!

Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

Sign In Register

Categories

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

Extreme Call-Writing Doesn't Work - Morningstar J Ptak

yogibearbullyogibearbull
in Fund Discussions
Call-writing / covered-call ETFs are very popular - JEPI, JEPQ, DEVO, etc.

Covered-call is a basic option-income strategy. You sell calls on some of your stock holdings & collect the premiums. If the stock remains below the call strike price, you keep the premium & the stock. If the stock rallies, you may have to give up the stock on assignment or option expiry. So, you get extra income by giving up some upside of the stock. This option premium income is subject to ordinary income tax (unlike dividends or CGs). You are exposed to the full downside if the stock falls sharply (unless some puts are also bought) - an overlooked RISK in the late stages of a bull market.

Extreme cases are call-writing ETFs for single stocks. But "if something is little bit good, then lot of should be great" FAILs.

Morningstar @JPtak shows that in a recent M* article using YieldMax ETFs as case studies. He says that high distributions from these funds is like "drawing blood from a stone".
https://www.morningstar.com/funds/an-etf-gained-almost-42-year-its-investors-still-lost-money

Comments

  • equalizer
    A little too much research for M* article, but then you see it was written by a CFA. I’m going to fail the quiz on whether this article sufficiently demonstrates that whole JEPI gang is in for disappointment.
  • yogibearbullyogibearbull
    Look at one extreme example of these new income vehicles from YieldMax - NVDY.
    https://www.yieldmaxetfs.com/our-etfs/nvdy/

    Related to Nvidia/NVDA is call-writing etf NVDY, and the StockCharts shows distribution-adjusted NVDY, actual prices _NVDA and the underlying NVDA.

    Things to note:

    1. Is NVDY an appropriate income vehicle? Just because you put a collar on a tiger, it doesn't make it a dog.

    2. Results would depend on the entry point - extreme loss or gain.

    3. If speculating on NVDA, why not buy calls on NVDA yourself? 3-mo $185 call can be had for $12.20 - downside is $0, upside is wherever NVDA goes in 3-mo. Of course, you would do this when you feel very bullish on NVDA or gamble ahead of earnings release.

    StockCharts, 5/11/23- https://stockcharts.com/sc3/ui/?s=NVDY&id=p90585565195&compare=_NVDY,NVDA&perf=false
  • equalizer
    I had put NVDY on watchlist earlier this year, but bought few shares of NVDA instead.

    YTD -~+30% NVDA
    -30% NVDY

  • rforno
    edited September 26
    @yogibearbull I suspect most people don't have the knowledge/expertise/desire to do the work involved with writing/selling options.

    For them they see 'big yield!' in a single position and just click 'BUY!' ... which is far simplier than looking at the greeks, putting trades for calls/puts with appropriate risk/reward prospects, etc. That the NAV eats itself doesn't really pop into their mind as long as the fat 'dividend' shows up each week/month.

    Unless it was a special situation/reason, I would always prefer owning the underlying myself. Not to mention, there's no (often-exorbitant) ER. :)
Sign In or Register to comment.