Covered call strategies disappointed investors during market volatility

Thur, 08/08/2024

by Ellie LeTu

Source: Financial Times

• Failed defense against high volatility

  • Derivatives sales failed to offset the sudden decline in most U.S. stocks this past week.

  • Despite a quick rebound in the credit market, covered calls underperformed the S&P 500.

• Popularity of covered call strategies

  • Investment in covered call ETFs surged from $18B in 2020 to $80B today, becoming a popular risk management tool.

  • Optimization of these strategies began in 2022, during a steady market decline, unlike the sharp drop on 08/05/2024.

  • Earnings depend on stock price gains, bond income, and derivatives.

• Covered calls (ETFs) are not superior

  • Designed to mitigate downturns, less effective for long-term investing.

    • Example: JEPI and Buywrite ETFs had lower year-over-year returns than the S&P 500, despite smaller losses this week.

  • Covered calls are better suited for selling volatility rather than defending against market downturns.

  • ETF investors should carefully research and advise clients, especially regarding options selling in volatile markets.