Covered Calls (Free Money or Waste of Time)

I was recently caught up in videos by the world traveling, money is no issue, and ostensibly Tesla owning trading influencer Invest with Henry. In his videos he teaches his listeners how to make money trading options often inside his $2 million Robinhood account. If you watch enough of his videos (or similar influencers) you will see them mention covered calls as a way to earn reliable income. This is in my opinion bad advice. Let me give a quick example of why.

There are funds out there where you can pool your money together with other investors and sell thousands and thousands of covered calls on indexes such as the S&P 500 and Nasdaq 100. I often see these funds promoted because of their high dividend yield. However, I think most people should stay away from covered calls whether they are doing them manually or via a fund like those I mentioned. This is because they drastically underperform simply buying and holding the stocks or indexes in the long run.

XYLD is an ETF that sells covered calls on the S&P 500. It currently has a distribution yield of 11.19%. So why wouldn’t you want to buy it. In this first image below you can see the price performance of this ETF.

It is important to make sure we include dividends in the calculations. So this second graph shows the return when you include price and dividends. Now it actually looks pretty good.

Unfortunately, there is no free money out there to be had despite what covered call promoters make it sound like. Now in red you can see the results of the regular S&P 500 index ETF SPY with dividends reinvested. It drastically beat the total return of XYLD and was much more tax efficient. If you want money to spend just slowly sell little bits of it.

To show whether or not Henry is doing better by selling covered calls is pretty hard to prove one way or the other. But this professionally managed covered call ETF shows that making more money by using covered call ETFs is highly unlikely for anyone.

Disclaimer

This is not investment advice. This website is designed to talk about investments but it is not designed to give you personalized investment advice. This site is generic and should not be used as the basis for any investment decisions. This is for entertainment and educational purposes only.

The owner of PatienceToInvest.com is also a trade leader on Collective2.com. We may receive compensation by promoting some collective2 strategies over others.

Investing is risky and can result in the loss of all your capital and even more than your original capital in some cases.