Every time I think I found a good investment product Ben ruins my plans, I'll thank you in 20 years

I think everybody who like covered calls ETF understand that they give up upside in exchange for getting dividends now, every month. Instead of waiting years when (ever?) portfolio grows enough to be able to take profit.

@jaycox1836

Ай бұрын

I like it for my mid-to-near term bucket. Pays significantly more than bonds & CDs

@njkl3445

Ай бұрын

If you are not going to reinvest the income from the call option, might as well just have an allocation of the underlying asset and bonds, and sell small portions of it every month. That will get similar total returns, monthly income, and downside risk, while having a lower expense ratio and more tax efficient.

I'm glad the plain bagel gave you a shout-out... I'm enjoying the content so far!

Was waiting for this one!

The income/capital gain mental separation is too powerful. I know full well they shouldn’t have any affect but sometimes I turn off the rational voice just to bath in the warmth of “certain predictable” income

@Omar-et7sb

Жыл бұрын

I hear ya'! I used to get triggered by some of my closer-to-retirement-than-me buddies and their insistence on "cash flow" generated by their dividends, and then me banging my head against the wall trying to explain how total return is more important... but I honestly lay off them now. I get it. The brain needing to be cozy is indeed powerful. It's also why some people hold more cash than they (probably) should. Understanding that "pace of mind" is important. Heck, my portfolio has a slight REIT lean - which is also completely idiosyncratic risk - in a tax advantaged account! (Does not lead to higher expected returns) But I do it because it's a small enough slice and it being there fools my brain into thinking I am a "real estate investor"... whatever the heck that means. :)

Every one of your videos has great citations, but this one is phenomenal! What a gold mine of information. The insights about the skewness of equity outcomes vs. covered calls (or any structure that caps the upside of equities long term), and how the Sharpe Ratio is abused without accounting for lost skewness, were fantastic! Your podcast guests were amazing, even if what they ultimately were doing is explaining to the CC crowd that Santa Claus doesn't exist.

@BenFelixCSI

Жыл бұрын

Thanks!

I'm invested heavily in CC ETF's, I'm Canadian. My thoughts are that I'm purchasing income. I'm retired and require cash flow. If I held only non-dividend paying stocks, I would potentially be forced to sell in a downturn. With manual DRIP I can choose to reinvest the dividends or withdraw for living expenses. In Canada we have RRSP and TFSA (like Roth IRA), between them both I generate a substantial amount of income, more than I need. And my situation is unique in that I'm single with no dependents so long term, not an issue for me if stock prices decline. The other point I think is that the bull market days are over for the next decade. There is so much debt out there, the system is imploding, so why not capture some income on the way down?. Just my thoughts, I'm no expert but this works for me. Good video

@theicedragon100

Жыл бұрын

what about other options with less risk like reits and dividend etfs.

@rahulsampat8698

Жыл бұрын

Can you tell me what income cc etfs do you buy in Canada? Asking for my aunt.

@steftrando

Жыл бұрын

You are suffering, the mental accounting bias, that treats dividends, and returns separately when it should all be together as total returns

@A_man_not_your_man

Жыл бұрын

​@steftrando Seems like a logical course of action based on their current situation, in a volatile market moving to fixed income seems far more intelligent if you're near or at retirement age

@steftrando

Жыл бұрын

@@A_man_not_your_man equities, outperform, fixed income, and pretty much every 30 year.

This is a good video. One item I may add is that the sales pitch of the buyers of call options being speculators and by writing covered call option, you are the "house" for that speculative activity by taking the opposite position. The problem with this logic is that the prices the option based on supply and demand and if everyone can become the "house" you eventually over supply the market to the point that you're better off being the buyer. The market's collective wisdom is what sets a fair price. Aside, the real house is the market itself which comes in the form of bid-asked spread and commission. Whether you buy or sell a call or a put option, you are _never_ truly the house. The retail investor always pay more than the market value and you always sell below market value at any given point in time. This is true even if you place a limit order as your order will not execute until it is no longer at market value. This is true even with individual stocks but with options, the short term nature makes the negative effects more pronounced when you repeat the process for many years.

Both covered calls and writing puts are often sold as safe strategies but this video really openend my eyes to the incompleteness of the sharp ratio. I highly recommend reading Nassim Taleb as he really focuses on the idea of tail risk.

It’s like selling some of your stocks to buy bonds. You give up the upside potential of the stocks you’re selling to obtain the steady income from the bonds you’re buying, resulting in lower total returns.

@missouri6014

10 ай бұрын

Exactly

@erranzimmermann1207

4 ай бұрын

Or you can just sell the amount of stock shares equal to the income you're looking for, but be better ahead because the return on stocks are higher in the long run over bonds.

@MStar10

4 ай бұрын

What? Have. you compared the yields on most CC vs Bonds - they is the major difference. You are giving up some of appreciation for high yielding. monthly CF (10% or greater)

@MStar10

4 ай бұрын

@@erranzimmermann1207 The problem is with an investor's emotional ability to 'sell off' a portion of their pie - whereas with distrubitons its 'forced' monthly (mainly)....its consistent and doesn't really timing the market.

@erranzimmermann1207

4 ай бұрын

@@MStar10 and that links with what Ben mentioned - it's mental accounting, which leads to sub-optimal portfolio selection. If someone needs monthly cashflow by selling off shares, there shouldn't be any market timing anyway.

I agree that CC ETF's have high MER's, however I write Covered Calls on my own stocks. It's a good income strategy, and if the stock gets called away, I'm also happy to take the gain.

Excellent video once again Ben. Keep up the good work!

Covered Call ETF's are starting to be spruiked within Australia - an article recently from our flagship financial newspaper I think gave a realistic assessment of their use. The head of an ETF provider in Australia gave this comment: “The strategy can succeed as a tactical play in a range-bound market. However, long-term investors are better off investing in ETFs that don’t put a ceiling on potential capital growth.”

While you are certainly correct, I do use certain specific funds that do some limited covered call strategies that don't experience capital erosion, but I am biased and I KNOW that I'm biased and choose to roll with it and "pay the psychology premium". There's a cost associated with it, but considering that I don't experience much more expensive biases like FOMO and panic selling, the psychological tradeoff is acceptable to me. There is something to be said for a reasonable investing strategy that fits an investor's psychology. Also, the dividends pay out even during a market crash, when I specifically DON'T want to sell total market index for cash.

@swissarmyknight4306

Жыл бұрын

Love the channel by the way. You do a great job.

@MarkLearns

Жыл бұрын

Yep. This. Funds that generate cash flow without capital erosions do wonders for psychology, especially during hard times when you do not want to sell!

@BenFelixCSI

Жыл бұрын

In that podcast episode with Meir Statman that I showed a clip from, he also talked about the difference between an error and a want. Someone investing in a cc strategy because they think it has superior risk-adjusted returns is making an error. Someone who recognises that they are making a sacrifice in terms of expected returns and portfolio quality, but still wants to invest in an asset for other reasons (behavior improvement, expression of values, non-standard preferences etc.) is expressing a want.

@swissarmyknight4306

Жыл бұрын

@@BenFelixCSI Thanks for reply, and again, great work, love the channel.

@johnbrown1851

Жыл бұрын

My investment in Qyld has done better than my investment in BND total bond ETF and SCHP . I use it more as a bond in my IRA. Comparing Qyld to QQQ is like comparing apples and oranges.

We needed that rational reminder!

I swear that this video and the "relevance of dividend irrelevance" video should be forced and required watching for anyone purporting themselves to be "finance experts". Great job!

@itsalltakenup

Жыл бұрын

Spoiler alert: Dividends are incredibly relevant to an income-based investor

@BenFelixCSI

Жыл бұрын

@@itsalltakenup income-based investors are not investors who require income. They are biased or error-prone investors who need help figuring out how to spend from a portfolio. It's an important difference. Investors who require income should still be focusing on total returns.

@roknrolla01

Жыл бұрын

It is always easy to talk in terms of rationality and logic. It is however, in terms of investing and money in general, a short sighted view of the "most efficient" way to invest if there is no consideration on psychological factors. It is easy to tell people to eat healthy. It is hard to craft a plan and stimulate them to do it right, you will find most of the time telling them to just eat healthy and exercise is not actually of any help and will achieve nothing. I understand this is not David Ramsey show lol. But just saying, maybe we should not tell people they are 'wrong' for certain decisions which fit their idea of handling money their own not super efficient way if there are other factors to consider around thr financial markets, and not personal factors necessarily.

@itsalltakenup

Жыл бұрын

@@roknrolla01 100%. There’s a difference between “this is an optimal strategy” vs “this is the only strategy”

@Omar-et7sb

Жыл бұрын

@@roknrolla01 Not really the point for actual experts and advisors to literally lie just so you can feel cozy with the mental gymnastics you need to apply in order to feel correct. "Income based" investors or whatever you call it follow sub-optimal strategies and in doing so accidentally trick/mislead their followers into thinking they are getting "free cash flow". If one truly and really cared about fixed income, other approaches would need to be taken into cosideration... and it would not be to build a portfolio of SCHD's galore.

Love it! Thank you Ben

Good info . So for those that are retired, and depend on income from their portfolio , what do you recommend ? ( The problem with just owning index funds, is if the market is down 20-30% in a year, you still have to sell to live off the proceeds . Putting you in a hole that is difficult to ever catch back up. )

The last example is terrifying, people reaching these levels and not getting that is really bad… Happy with my diversified simple passive ETFs…

Excellent vid Ben. I already listened to the podcast but wanted to see the vid too.

What about implementing the strategy yourself, without the need to rely on an ETF? Do these learnings also apply to Selling Puts? What about Selling puts + Selling Calls (also known as the Wheel strategy)?

Good stuff mate, as always.

Legend is back

Hi Ben, we all need a friend like you who saves us before we lose everything on these tricky illusions.

In periods where the index are flat over time it seems the income is better. e.g. S&P500 last 18mo, 2007-2013, 2000-2006, 93-94, many other time periods.

Excellent learned allot. Ben keep up the good work hope you make more videos more often.

What if you also hold the underlying assets?

Been waiting for this one...

@Omar-et7sb

Жыл бұрын

same!!

UMAX etf covered call, is there an alternative with the same 13 companies?

Ben, i know this is off subject a bit, but trying to get a response from you. For a small cap value tilt, you recommend avuv, avdv. If held at market weight, would you recommend the tilt include aves (emerging value)? Something like 60/30/10, or leave it out due to the risks?

@BenFelixCSI

Жыл бұрын

Can’t give specific advice, but I do include EM with a size / value tilt in my portfolios.

Do skewness or kurtosis explain factor outperformance? For small cap investing, for example, why not think the risk/return premium is explained by the longer or fatter tail on the downside (e.g., a liquidity crunch comes along and puts smaller firms out of business while larger firms can weather it)?

What about the wheel strategy when working with options? If your covered calls are exercised, you then sell a covered put

After reading the income factory I have to say its up to the style. If you want returns and growth then investing in cc etfs most likely not your route. But for those that want CASH flow being diverse in a few of these cover calls and reinvest divs provides growth through cash. Some people like to be more liquid 🤷🏾‍♂

@CanadianFinanceSimplified

Жыл бұрын

Just read the Income Factory description and I would have to imagine they would fundamentally disagree with each other (having watched all of Ben's material).

@BenFelixCSI

Жыл бұрын

CASH flow is a mental account. Total returns are what matter. Catering to mental accounting is fine to the extent that it helps people behave better, but it will almost always lead to suboptimal portfolios.

@AntBoogieWorld

Жыл бұрын

@@BenFelixCSI depending on how much you can contribute and how much time you have. Also you ignored the fact that makes a huge point, total return has no true value until you sell. Where as an income investor has cash flow and real liquid being built monthly . I personally never have to sell and that mental state of never having to sell and only worry about what the cash flow does means more then you like to give it. Every business is about cash and what it can create. Total return to a certain degree is waiting to agree or see what the market says. Each style plays a pro and con. All about what you want. someone invested in certain blue chip long term like Intel are not doing as well like someone in a cover called etf allowing you to grow with reinvesting 👍

@simonp6339

7 ай бұрын

@@AntBoogieWorld ​ What Ben implied is that you will both have better expected "cash flow" and total returns if you use normal passive index funds and sell part of the shares for your "cash flow". Even after selling parts of the position, you're expected to have more money in the position than with a covered call ETF, with the same "cashflow". "Cashflow" is just a mental concept that has no impact on technical properties of an investment (bar negligible transaction costs) and how much money you can have available at any point in time. You can emulate any "automatic cashflow" via selling parts of a position and still be better off.

@AntBoogieWorld

7 ай бұрын

Sorry you are just wrong .. for one selling stock for income is the worse way to get income. Read the income factory your style is one way and it's an old school way of doing things. With CC etfs paying higher then ever it makes no sense buying index to sell for cash flow. New ways are coming learn to check other styles... that style is dated. @@simonp6339

Very well-researched and informative as always 👏

My belief is that the market will have low relative returns for the next decade which is why I think a cc etf will be decent monthly income hedge. Also, selling on a monthly basis runs the risk of completely missing out on the few days/weeks of high performance that typically account for a funds overall yearly return.

i got a question. if selling covered calls is expected to underpreform the underlying asset in the longrun due to the upside skewness of returns, maybe it makes more sense to buy those calls instead. What if i were to buy deep in the money calls on a globally diversified market cap weighted index portfolio. Well since its deep in the money the return of the option should mimic exactly the return of the underlying with some extra leverage. As the option starts to get closer to maturity we can just roll it over, sell it and buy another one farther out in the future, perpetually. We can choose super long term options like LEAPS, to minimize transaction costs. I call this the Perpetually rolling deep in the money leaps strategy, and i think might provide a cheaper access to leverage, and offer investors access to leverage that doesnt have to reset daily in registered accounts. Instead of paying a margin interest rate, i pay for the cost of the LEAP and I feel like that might be cheaper. would love to see an analysis on this

@MStar10

4 ай бұрын

Wow, very interesting - I would love to see more details on this strategy. I think options strategies are dismissed without going into the the different sub strategies that can be used (ie. Wheel strategy)

Does it make sense to buy covered call ETFs at or near a market top? Even Ben said they work best when u r expecting a flat or negative market

@voo5000

Жыл бұрын

Not in my opinion, cc funds drop as quick as anything else, they just dont gain it back when they go up

@BenFelixCSI

Жыл бұрын

If you can correctly predict a market top, covered calls are probably not the best strategy to capitalize on that prediction.

Good video. I hear about covered call ETFs on Prof G's podcast. I think people are drawn to them because it sounds like a "free" way to generate income. But there's still no such thing as a free lunch. I like how Ben Felix's videos basically always end with the same takeaway: "you're probably best off with a low-cost index fund..."

New to your channel! Liked and subscribed! 😊

I use a mix of both traditional dividend ETFs and covered call ETFs and do very well. They both invest in traditional dividend stocks.

@Unifrog_

10 ай бұрын

Have you held the through a bull market to compare their performance when upside is being limited?

Hello cat Felix, it was a great idea to include these podcast shorts at the end. You should do this more.

@BenFelixCSI

Жыл бұрын

Thanks! I wasn't sure if it was a good idea. I'm glad you liked it.

What are your thoughts on using covered call during flat/uncertain markets. Usually in conversations I dont hear much interest in the income aspect, only the hedge aspect, (thetagang wallstreet bets types)

@BenFelixCSI

10 ай бұрын

All markets are uncertain and no market is flat on expectations.

Hi guys. I have never hear Ben talking about commodities. Do u think water is a good investment? It seems non volatile and steady increasing.

Ben, can you confirm if you're referring to things like the YLDs, the JEPs, or both?

@juanjuan5314

Жыл бұрын

Maybe QYLD?

Thank you. Well timed and needed objective view esp for any age in retirement. Don’t chase yield?

Great video and content as usual. Does it imply calls (and indeed put) options are sold at a "fair" price? I would hypothetise that buyers over pay for options because of irrational utility of big gains and hence the option seller can capture a premium over time. Any empirical evidence supporting this?

@BenFelixCSI

Жыл бұрын

This is known as the volatility risk premium, where implied volatility in option prices is higher than realized volatility. It is well documented, but I think it is captured by my comments on skewness in the video. Volatility may not capture the full risk picture for an option seller. They can get hit hard by large moves in prices.

This may be a dumb question, but I’m going to ask it anyway. If selling covered calls tends to underperform just holding the underlying asset, does that mean that buying covered calls should tend to over perform (ignoring taxes and fees)?

@billwang3107

Жыл бұрын

wow that's an interesting question

@remcodezwart2654

Жыл бұрын

I agree, definitely an interesting question!

@BenFelixCSI

Жыл бұрын

Not a dumb question. Selling covered calls reduces your exposure to the underlying equity. Buying calls can give you leveraged exposure to the underlying. Leverage increases expected returns.

It's amazing to hear that there are funds out there with that kind of aum being run by people who don't understand how risk works :o

We love Ben!!!! I don’t understand the hype for covered call ETFs.. especially for young investors

@OurNewestMember

Жыл бұрын

I think risk aversion differs across generations

When I boil things down and look at the price of an ETF over time and the distribution to its investors over time I fail to see a flaw in the investment despite all the technical stuff. Am I missing something? take XYLD for example. In 2014 it was $46, its at a low now of about $39 and if its paid its distraction monthly investors have been paid handsomely have they not? I fail to see the risk compared to holding the underlying equities.

4:36 - when I make this point about tax inefficiency, the rebuttal I often get is, "I only do covered calls in a tax advantaged retirement account." So after I wince, I refer them to the previously solved problem about active trading underperforming passive indexing over retirement time horizons.

@Omar-et7sb

Жыл бұрын

Exactly...

Skewing toward income is also useful to avoid needing to sell assets when markets are down. Other approaches include large cash or bond allocations, which are in turn reducing the potential return of the entire portfolio. Oh, and by the way, risk is not the same as volatility, and all computations which assume risk is volatility are ignoring real world risks for an idealized simplification. This is a cognitive flaw that affects sharpe ratio and many related computations.

Hi, love the content! Just wanted to ask, you said in various videos that you would not talk about dimensional fund advisors funds as these are not available to DIY investors but as a late, DFA have launched various US/international small cap/value/profit ETFs. Could you make a video to review DFA ETFs and comment on their suitability for DIY investors? Thanks so much!

@zvxcvxcz

Жыл бұрын

As far as I can tell from the prospectus documents, the ETFs seem to be market cap weighted, which seems to be a substantial difference from the funds. They do still seem to be a good way to target certain categories though. While there are some other options, there isn't an excessive abundance of ETFs targeting small cap value for instance. I would need to double check, but I think they are more expensive than the comparable Vanguard fund though.

is that mean by covered call etf out performance when market drops, therefore, should prevent from all covered call etf

This will trigger some people! 😂 Great video, as always. Ben, do you mind sharing some good books that you recommend or that are behind you on the podcast? I’d love to hear some recommendations from you. Thanks!

That is a Video I instantly need to watch, this is too Important Not to do it directly

sell and buy options should be equivalent. Otherwise one side should always get premium in expense of other. But if sell option is suboptimal strategy, can we say that buying option is suboptimal too? Is options in general are suboptimal in all ways?

@PapaCharlie9

Жыл бұрын

It's a bit more complicated. There are asymmetries in the way options work. Options are all about convexity, after all, and the convex curve isn't always symmetric. Evaluating optimal vs. suboptimal depends on what the basis for comparison is. Options trading is necessarily active trading, and since active trading is known to be suboptimal compared to passive indexing, in that sense all options trading is suboptimal. But if the basis for comparison is within the bubble of buying options vs. selling options, arguments can be made either way about which is optimal. Ultimately, the optimal option trading strategy is the one that best exploits mispricing of volatility.

Thank you, Ben, for the continued education. I appreciate these videos along with the podcast that you and Cameron provide. I have missed a few of the last podcasts, but I am one of three. What are your blind spots when it comes to your investment theory?

@swissarmyknight4306

Жыл бұрын

@Callme_pamyla That's what we need, fake FA bot spam.

@BenFelixCSI

Жыл бұрын

If I knew what my blind spots were, they wouldn't be blind spots! I do my best to get information from diverse sources, including those that disagree with my prior beliefs.

The condescendence is palpable. CC are a good tool. Not for everyone, but still usefull. I make a living out of them.

Greetings Ben! I've been your subscriber for many years now and appreciate the work you do. There's one topic that has been bothering me very much about Index investing which is that of the impact of arbitrageurs on the actual returns of the index investing. Since index construction and timing of rebalancing is public information, arbitraguers can predict the composition and weights of securities in the indexes before the index is actually rebalanced. This would in theory allow them to take positions just before a index is rebalanced, going long on entrants and short on exits, and before the fund managers of index funds and ETFs rebalance, thereby profiting from the price movements. Doesn't this reduce the expected returns of ETFs and Index funds? This I guess is more pronounced in market cap based index funds/ETFs but I can see the same problem can affect any factor based funds. Thank you in advance if you decide to take on this subject.

@BenFelixCSI

Жыл бұрын

Yes. This is well-documented and it's one of the reasons that my firm does not use typical market cap weighted index funds. Great idea for a video!

@KrishnanV9

Жыл бұрын

Is it then possible for us to play the same game if we know when the rebalancing is made?

@howardfriedman7077

Жыл бұрын

@@KrishnanV9 Yes but, it would take a lot of work without the use of a computer program.

so is it not suggest to hold such etf?

Can you respond to the concept of life cycle investing, that is using leverage, when cost effective, to more evenly distribute risk over one’s life time and therefore improving risk adjusted returns for retirement and other long term investments via the “free lunch” of diversification (in this case time diversification).

We really really need those videos in french!

FYI there are some strategies that work better in Australia with higher income returns for for tax reasons. Not sure if there are any in Canada/US.

Oh well …here I was thinking I will buy SPYI as they have the taxation part taken care of with fancy accounting and ROC income…..but I am wiser now ….great video.

Ben takes another swing at dividend investors…. 🥊 🔥

Can you please explain in layman's language what are "Covered Calls ETF"?

This is very niche, but I think in some cases covered call ETFs/other derivatives products CAN have better risk adjusted returns. For example, I'll be working at an options market maker meaning that my income is heavily correlated to the volatility in the market. Allocating a percentage of my portfolio to short volatility products (i.e. SVOL) and covered call ETFs allows me to hedge risk and capture over-performance in flat low vol market conditions that would otherwise reduce my income.

@BenFelixCSI

2 ай бұрын

Very good point.

That prof was quoting out of the money Put options.. which is same as In the money Covered Call writing. That gets a fat premium but not on upside of the underlying.

The downside with covered calls is you're getting the worst of everything: equity volatility, generally terrible pricing on the OTM calls (OTM is very typical and all but required to achieve tax benefits if you're in the US), plus short gamma on the call If you have the capital, a conversion offers better pricing dynamics. You sell the call and also buy the corresponding put. It's a lot more negative delta, so probably investors might want only one of these instead of several short call contracts. What do you get in return? - if the asset shoots up, you still end up worse off... Just like adding covered calls - if the asset falls, the long put replaces the missing gamma on the short call, so you continue gaining on the hedge where the CC stops contributing - the bonus: if the stock falls, the put tends to lose extrinsic value much less than the short call, so you end up getting an improvement which is not obvious from the outset The position likely earns the most by choosing an at-the-money strike (it doesn't take much above ATM before it gets expensive). A good time to enter is on ex-dividend or at least one month before the next ex.

I have been writing a couple covered calls on positions I have made money on, but am looking to exit sooner rather than later. It's something I have been trying out, but it's not at all my whole investment strategy. So far I've made pretty good returns on it. As soon as the option is executed though I'm not planning on doing a lot of options in the future. I think if you do it on a small scale on individual stocks you are already up on that you don't see as a long term investments for you it can give you some immediate cash, but it shouldn't be a significant part of your investment strategy at all.

I"m far far away from retirement and I"m sure there will be new "income generating" sources by the time I am, but for someone who is currently, or is close to retirement today would covered call ETFs be a decent investment then? Assuming they don't really worry or care about loss of potential capital appreciation over a 20-30 year time horizon ?

excellent.

Great stuff

I've gone in on Covered Call ETF's because I'm in a part of my life where monthly income is more valuable to be than total return. I'm pretty happy with how things have gone to this point and can only hope it continues.

@steftrando

Жыл бұрын

Total return is what matters. “Income” is the same as just selling parts of your total portfolio.

@BenFelixCSI

Жыл бұрын

Income never matters more that total return. Total returns put food on the table. Income is a mental account.

@aaronhall5715

Жыл бұрын

@@steftrando My income matters to me in retirement regardless of total return if that's a better way for you to look at it.

@aaronhall5715

Жыл бұрын

@@BenFelixCSI Not if you weren't financially literate for your youth and find yourself in retirement needing a steady...ish income. If I were to do it all again, I'd of course look to total return but as I said, I'm in a part of life where income is more valuable to me now than any potential future total returns.

@brianholmes9028

Жыл бұрын

@@aaronhall5715 just sell shares if you need income?

Ever since Ben made that article and responded to a comment on Reddit I've been hoping that he'd make a video on it.

@Omar-et7sb

Жыл бұрын

Link? Would love to see the article and reddit post if it's not under blackout!

@BenFelixCSI

Жыл бұрын

www.reddit.com/r/PersonalFinanceCanada/comments/13pu0zf/i_made_a_mistake_on_investment_covered_call_etfs/jlbnqdd/?context=3

You can dismiss most exotic ETFs simply because the fees are north of 1-2%, twice that of an actively managed ETF.

How about ETF with 50%(in average) covered call position like QQQX that also come with tax treatment? In long terms it seems better than SPY. Thanks for your time in advanced.

What about Sortino ratio, which only considers the downside standard deviation but not the upside standard deviation? I think that it would be more accurate for returns with negative skewness.

@czcbearsrule1

Жыл бұрын

Not necessarily, as negative skew events while extremely impactful are also rare enough that they even Sortino will not necessarily pick them up. Standard deviation is in the second moment of a distribution, so anything using it including Sortino will not always pick up third moments like skew.

@BenFelixCSI

Жыл бұрын

Frank Sortino recognized that the Sortino ratio did not deal with skewness. He later suggested the Upside Potential Ratio which does a better job.

@PapaCharlie9

Жыл бұрын

Sortino is a co-author of one of the papers Ben cited when talking about abuse of the Sharpe Ratio. The abstract basically says Sharpe bad, UPR good.

I have only one covered-call ETF (SPYI) in my portfolio representing about 10% of my holdings. I am curious to see for myself how it performs over time. There is nothing to disagree with in Ben’s video; however, as someone who is just now retiring, dividends and distributions are important to me. Sure, I would like there to be at least some decent growth of the underlying assets, but the dividend and distribution income is equally important to me. I really don’t want to have to sell off any of my holdings (especially in a down market).

As soon as he mentions "long-term", tells me he doesn't understand the benefit of CC ETFs. this video is biased :(

Explain why rolling forward and out is not an effective strategy to not lose upside potential and still capture premium. Thanks!

@remcodezwart2654

Жыл бұрын

Good question! How rare is it for a stock to increase so much and so steadily that you will be unable to catch up rolling forward and out? If you're patient you could play that game for years and eventually catch up with the stock while in the mean time pocket the time-decay extrinsic value on the premiums and be better off than someone who simply held the stock. I would like to see an example on how that would play out negatively, and how likely that would be. Early assignment is no argument since you can counteract that by re-buying the stock and re-selling the same call option. Every time you do that you pocket an additional time-premium, so that is even a good thing. The only problem is if the stock pays a divident and you get assigned just prior to the ex-dividend date. In that case you may potentially be set back by the dividend amount (worst case scenario). Then again you can work around ex-dividend option periods by either selecting a higher extrinsic value than the dividend amount, or skip selling options for that month altogether.

Depends what you're investing in and where you live. In Canada the majority of our stocks are dividend stocks. Our returns will be subject to US withholding tax if we just buy US stocks. However some funds I've invested in actually do have high returns as well as paying dividends. Usually they don't do covered calls on the entire portfolio, but for instance if you look at qqqy (the one on the TSA not the US one) it has kept up with or even surpassed QQQ. Or compare Yamz to AMZN. Pretty close performance.

Finally 🎉

In theory just investing in stocks, ETFs, etc. yields better returns in the long run - and I’m saying this in all seriousness - but you could also die or get ill before you ever get there. This is a way of getting approximately 10% a month that is useable now (and tax sheltered depending on how you use it) and you don’t have to worry about market fluctuations when you want to use the money. I’m mostly in stocks but I have put aside some portion for covered call investments so that I can use it to go on vacation whenever I want. I also use the cash to reinvest on opportunities that pop up, like when my favourite stocks are low.

what if you see the covered call ETFs as a proxy or pseudo fixed rent? you achieve a higher rate, in exchange of exposure to permanent capital loss. If you take the risk on that not happening in the long term to the S&P (have to take SOME risk somewhere!) makes for a pretty good risk/return balance.

@reubenvm

Жыл бұрын

Did you not watch the video? Your returns will be lower than holding the market...

This is not the same as selling covered calls, which I thought the title meant. This is in reference to a fund that generates alpha via covered calls. FNGU or TECL are pretty decent in lowering interest rate environments.

Not considering this myself , but still curious what everyone here thinks - Are rolling leaps an effective way to leverage a position in broadly diversified index etfs?

@OurNewestMember

Жыл бұрын

Leverage? It's okay. But that also means buying volatility exposure (including benefit/protection from extreme moves), so it sounds painfully expensive without a serious plan to manage these factors over time. If someone really wants leverage on an index, futures may be more direct (eg, buy the contract, leave some cash for margin, invest any remainder in some riskless asset). Or a very deep ITM long European call option (to tweak how much leverage, interest rate exposure, etc). But you may need to wiggle into to position due to the large bid-ask spread. Or sell a box spread and use the proceeds to buy the equity exposure (eg, ETF shares) I'm also assuming "LEAPS" implies equity options (ie, American style which will also tend to cost more). My main point is: for someone just wanting leverage, why pay more for expensive, unnecessary volatility exposure and limited loss protection?

@739jep

Жыл бұрын

@@OurNewestMember thanks for the thought out response. 👍

Is it any different for covered Puts?

@IndexInvestingWithCole

Жыл бұрын

Why would it be different?

@egal1780

Жыл бұрын

@@IndexInvestingWithCole because you can use the Cash to good use and Put otpions tend to be Higher priced, because of the Higher Potential for downward volatility.

@PapaCharlie9

Жыл бұрын

They are synthetically the same as CCs for profit/loss, with the same problem of having a capped upside and sacrificing future gains for cash today.

@PapaCharlie9

Жыл бұрын

@@egal1780 You get cash either way, with a CC or a CSP. If you are anticipating a lot of "downward volatility", you wouldn't want to run either CCs or CSPs, since they are both bullish directionally.

@egal1780

Жыл бұрын

@@PapaCharlie9 I meant that in the Sense that Option prices for the Puts are Often Times Higher than the Equivalent call Option. But yeah both would Be bullish strategies.

Thanks for "covering" this subject!

@OurNewestMember

Жыл бұрын

Nice call out!

Fidelity is promoting this thinking with "Income Strategies powered by OptionsPlay" which comes with a charge of $35/m.

Buying the DOW in 1929 got you back to the same level a few generations later in 1956. Stocks markets always go up is so dumb it hurts

@BenFelixCSI

7 ай бұрын

I’m so glad you brought this up, because it’s so wrong! The only way to get a 1956 breakeven is if you ignore dividends and look at nominal returns. With dividends and real returns the recovery was much, much sooner.

@drd3816

7 ай бұрын

Thats a good point and that view option is not available on a 100 year DOW chart. At least from what i can find online. I read an interesting book last year :The great Depression: A diary by Benjamin Roth--what a nightmare-- the govt and banks were brutal to the average investor and saver back then. @@BenFelixCSI

@BenFelixCSI

7 ай бұрын

That’s one of my all time favourite books. Incredible perspectives. My main takeaway from it is that people are collectively resilient when faced with extreme circumstances.

What about selling covered calls for SPY?

Nice

Maybe it's why I prefer to look at Sortino ratio

My opinion, when you are near retirement covered call ETF's are great. Picking some all in one covered call ETF's on market dips are hard to beat. Ben if you can point out some better ideas for those nearing retirement who need income that pay monthly dividends in the 10-15% I'd love to hear your thoughts, Is there a better option?

Not sure to understand everything but it would be interesting to compare the performance of the professor with the one of the non student. At some point the market will change of direction this doesn't mean that the investor has to stick rigidly to a strategy that stops performing. But maybe I didn't understand correctly.

Covered calls are great for income

I see JEPI euphoria everywhere

"Picking the pennies in front of the steamroller" - this is what writing options usually is.