Covered Call ETFs and FIRE - Thought's and Ideas welcome

My first post:

What’s your opinion on covered call ETFs (especially QYLD, NUSI, JEPI)?

For those who don’t know:
A Covered call ETFs sells covered (meaning that they own the underlying assets) in the money (at current strike price) call options in order to generate an insane amount of yield (like 7-12%+). The downside to this strategy is that you basically get 0 to very little capital appreciation. The share price of the fund is slow in recovery and can even trend downwards in some cases. You do make up for that with the income you get, but total growth isn’t as exponential as with VT f. e. The “dividends” are actually option premiums which get distributed to you - but for us swiss guys, they are just regular dividends.

Ofc those funds don’t make much sense in accumulation, because dividends get taxed here in Switzerland, but when retired, a chunk of your portfolio could be used to increase your overall yield. It also allows for earlier retirements, because the expected dividends are fairly stable as long as there is a minimum amount of volatility. And more importantly: They are much higher than 4 or 5% p. a. I’d say even a withdrawal of 6-7% p.a. with some reinvestment is really conservative when your fund yields like 10%.

By outsourcing this option-income strategy you don’t get the professional status as well, which would lead to more taxes on your whole portfolio, not only the dividend paying assets.

Oh and it is not “too good to be true”, because this strategy would have lost profits in the last 20 years compared to a growth strategy. But it would have generated much more predictable income.

Just to put this into perspective: 600K would already generate 60K of passive income (assuming 10% - QYLD does more like 12%+)- taxable but still much better than 600K in VT. With 1-2M you are already in the 6 figures of income.

What are your thoughts on that?

Taxed at your marginal rate. If you want to play this game, might be better to do it yourself. But see threads about selling puts, which is basically the other side of the coin. You can actually even do both with the same ETF, but then you are one step closer to being classified as a professional trader.

Yeah as I mentioned: You could bypass that risk by outsourcing the work to the ETF. And If I’d get 100K in passive income, taxes wouldn’t be my first priority. This is already a solid FIRE base with just ± 1M instead of 2M+ for less income…

Like you could still reinvest your leftovers into VT if you feel like it

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Just compare the Nasdaq 100 Future Mar 22 with the QYLD ETF you mentioned for the last 5 years (I didn’t find an ETF for Nasdaq 100 only)

Starting price for Nasdaq 100 Future was 5438.50 on 01.03.2017, today it closed at 13943.75
Starting price for QYLD on 01.03.2017 was 23.25, today it closed at 19.80. So even if you gained 10% per year (let’s assume 10% of 23.25 for 5 years for simplicity), you would end up with a total amount of 31.425 (19.80 + 5*2.325).

So Nasdaq 100 Future gained 156% over 5 years (even without dividends - would be higher if there’s an ETF for Nasdaq 100 including dividends), while QYLD gained 35%.

Sounds like a great idea, if you don’t want to earn more money :wink:

That’s true but I think we are talking about different stuff.

I have no doubt that a diversified portfolio or a sector will outperform QYLD or other covered call ETFs.

But that’s not the goal of them anyway. They are here tor produce somewhat predictable income (much more stable than dividends) based on option premiums. The underlying assets are basically irrelevant. Their only relevance is in their volatility - which is higher when comparing the NASDAQ 100 to VT or the S&P 500.

6-7% withdrawals / dividend consumption are no problem with a covered call ETFs. I don’t know if the same could be said about VT.

Options premiums are tax free for a Swiss individual tax resident (unless you classify as a professional trader, but that’s another story). It makes a huge difference tax-wise vs dividends/interests which are taxable.

Meaning you are constantly exercised ? Buying back the position with the proceeds, selling the options, waiting for the next exercise, repeat. I’m sceptical about the long term performance.

Ok, I get that one. One thing you have to be aware is that your covered call strategy works well in stable market conditions. If you check QYLD, I can only find data back until Dec 9th 2013.

Quickly checked, and I’m sure there’s more: Motley Fool - Stay away from covered calls - Covered Call ETFs (in German)

Investopedia - Covered Calls

There’s no free 7% withdrawals without a problem. If that would be the case, bond holders would just use the strategy you propose to get 7% on an annual basis, while preserving most of their capital.

Which, btw, didn’t happen with QLYD. You started with 600k, and end up with 511k (if you withdraw the yield).

Looking at the bigger picture, the main “problem” with the covered call strategy is the high initial amount of money you need to implement it. You need at least 1M to generate a 6 figure income.
And still you will have opportunity costs: you might gain way more by sticking to a traditional large stock market ETF if you look at it from a longer investment horizon.

I think it’s a strategy for people who have 5M+ in assets, and want to put 20% in assets which provide a somewhat stable income. If you “only” have 1M, I wouldn’t put all my eggs into one basket.


iirc, they sell european options - so they only get exercised at expiration.
QYLD has a good article on that: QYLD’s Covered Call Options, Explained – Global X ETFs.

I read this one, basically they say with this strategy you are losing price appreciation, which we know.

Now let’s say if I am retired and not in an accumulating phase anymore. I buy a bunch of VT, VTI, ITOT or another ETF with tight spreads for options worth 1 million. Instead of selling them when I need money, I write 1 call corresponding to selling 100 units. Slightly in the money probably. To have cash for expenses, meanwhile I borrow on margin or using cash. This strategy is worth to consider. I just would do it myself and not via a ETF, because then I would know exactly how much, when and at which strike I write calls.

The problems start as usual when markets are going down for long time. My margin is decreasing and once I finally sell, it is at a price much lower than I would have obtained if I would sell it directly first time I was writing a call. So maybe write calls instead of selling only if you are at or very close to ATH at the moment?

Exactly this, plus one other issue: if you sell a covered call ITM, you might get assigned if the price of the underlying asset increases sharply in price. Yes, the propability is not that high with VT or VTI, but it still exists. Then you are faced with the decision to roll over your contract or to get assigned.

If you have enough money to consider covered call ETFs, I recommend looking at BigERNs website about option writing. He’s doing that on a larger scale for SPY, using his mutual funds as security. Earns him some good side income. One thing you have to know: he’s a PhD and worked for a big finance company, so he knows what he’s doing.

If I sell a call and I am getting assigned, I still get a premium in comparison to the spot price at the moment I was writing a call, so it is not a problem. Problems start if you are not assigned, and you write another one, and another, and another for a long time, and finally, once you are forced to sell your ETF one way or another, you are selling much lower than original spot price. And collected premiums cannot compensate the difference.

QYLD had a yield in the range of 10-12.X% historically. Sure it lost value over the long term, but it yielded constant monthly dividends in the process, at least 10% p. a.

That’s why I said 6-7%… Even if you’d invest 3-4% back into the fund, to keep your income constant (although the income per share hasn’t really declined even though the share price dropped), you’d end up with a net positive of over 5%.

Sure capital appreciation would be 0, but you could just use some of QYLDs yield to invest into VT and keep your withdrawal at 5% and still be much more stable (income wise) than with a traditional VT portfolio.

I don’t own it myself, because I see no benefit of having it in the accumulation phase, but even just having a bit of your portfolio in QYLD (100K out of 2M f. e.) would boost your yield dramatically (10K+ a year)

Selling options (other than protective puts) is probably a killer criterion to get taxed as a professional investor.

When using an ETF you outsource this work. Sure the TERs are higher here, but still under 1% and you are not taxed on the rest of your portfolio. Imho that’s worth taking into account.


An interesting topic. I’ve been eyeing on the QYLD for a while now too. But I haven’t pulled the trigger yet.

First of all, that QYLD ETF is nothing new, you can just write covered calls yourself and make even more than that.

Yes, if you like to outsource and don’t have time to do it on your own, you can sure buy their ETF. But keep in mind, you’ll pay dividend tax on it which is equal or greater than 15%.

You said performance will gradually decrease or the price of it will drop. That might not be true. It tends to look like that right now and the fund has some ups and downs, mostly downs recently, but that doesn’t mean the fund won’t go up in future. If it really dips long-term, it would equate to putting your money and withdrawing it from the fund slowly.

Being marked as a professional trader is not the end of the world. Your proceeds would be taxed as income. If your income tax is lower than 15%, I would personally do it. Besides, I’m not sure how likely you will be defined as pro trader. People on this forum say different things. So, you might get away with selling puts.

People above said about investing in an index fund with greater return aren’t wrong. If you invest long-term, your outcome with an index fund like SP500 will evtl. outperform QYLD plus dividend received. I think it’s just a matter of personal preference and lifestyle. If you are retired and want to have a steady stream of income, QYLD is not bad. If you are young and want to accumulate wealth which you don’t need, go for index funds.

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I’m not sure if I understand this sentence. Isn’t it the idea to get premiums by selling covered calls again and again, to get a consistent income stream? From my point of view, the problem occurs when the underlying asset gains rapidly in price. Because then you have to sell your shares at the strike price, and you’ll miss the additional gains above the strike price (yes, it’s strike + premium to be precise).

I don’t understand why you have to sell for a lower price than the original spot price. Can you explain this one a bit more? Maybe I’m just missing the obvious here.

Like in many advanced trading strategies discussed, there is no miraculous solution. QYLD specifically has

13% p.a. distribution yield
8% per year total return yield (with distributions reinvested)
Price was 25 in 2014, went down to 18 in corona dip and now 19.8.

So you earn massive yield by killing almost all potential upside and slowly draining your principal. If you live from your portfolio and don’t care about it preservation - why not? But you should clearly understand what you are getting and at which price. And ideally you should very well understand what the fund management is doing.


I’m with you on this one here.

The idea is never to get assigned. In this case, you can always collect premium which is what you want.

If you get almost assigned meaning the price goes through the strike, you can either get assigned and sell the shares or you can roll up and out your covered call.

If you get assigned, you can just sell put right away and wait to get assigned again. The game goes on and on.

With just a caveat, the stock must go up long-term. If the stock tanks, you’re screwed.
Option strategy sounds too good to be true, until it’s not. It works until it doesn’t.

Ok I will try to explain what I think.

Let’s say you have lots of shares of VT. Current spot price is 100. You need cash to finance your expenses. You can do following:

Scenario 0. You sell 100 units of VT at current price, get 10 000 in cash. End of story.

Another scenario, step 1. You sell a call, strike 100, premium 1. You have now 100 in cash. You borrow another 9 900 on margin.

Step 2a. VT goes up to 102, your call is assigned. You get 10 000 in cash and you earn +100 in comparison with scenario 0. End of story.

Step 2b. VT goes down to 95, you call is not assigned.

What do you do now?

Step 3a. You sell VT anyway, get 9 500 in cash. You lost 400 in comparison with scenario 0. End of story.

Or you sell another call. But at which strike?

Step 3b. You keep the strike equal to the current spot price. Now you sell a call with the strike 95, get a premium 1. VT goes to 97, you get 9 500 in cash. Together with premium you lost 300 in comparison with scenario 0. If price keeps going down, your strike is going down. At some point your call is executed, say, at 85. You earned a small premium but you lost 1500 in comparison with scenario 0.

Step 3c (my favorite). You keep selling calls with strike 100. VT price goes down. Further down it goes, smaller is your premium. You need cash, you take a margin loan. Price goes down again. Then China invades Taiwan, for 10 seconds VT crashes 20% down. Your margin requirements are not satisfied, all your assets are sold at spot price. Now you have a pile of cash worth 10% of what you had at the beginning and no chance of recovery.


Or just buy (guaranteed) annuities?
Does such a thing exist in CH (as it does across the ocean)?

Isn’t it called “pension” on this side of the Great Pond?