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I've been trying to learn what I can about a covered call retirement income strategy. To that end, this thread is interesting.


I sell puts on occasion, for companies I want to buy anyway. Because of this, I have been very pleased with the performance of this strategy, although the numbers are small compared to our portfolio so it isn't exactly a get-rich-quick scheme.

It seems that covered calls might be the complementary strategy during a retirement sell-down. I would only sell covered calls on stock I want to divest anyway.

I am not interested in holding an ETF such as QYLD. Calls will be covered in an un-registered options trading account.

To this end, I would appreciate information or thoughts on this sort of strategy. Thank you in advance!
 

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To this end, I would appreciate information or thoughts on this sort of strategy.
I don't think it's a useful strategy. To convince yourself of this, just look at the BMO ETFs that have existed for a long time, e.g. the Canadian Banks covered call ETF.

They've been around for a very long time. You can look at the performance yourself and you'll see that the covered call strategies all underperform the main stocks (say the bank index, or utilities index). You can also plug them into Portfolio Visualizer to simulate what would have happened with retirement withdrawals, e.g. monthly or annual $ withdrawals from the portfolio.

Those comparisons show that when taking money out of the portfolio, you'd end up worse off in a covered call strategy. It was better to invest directly in the regular stocks and withdraw money that way.

That's even though selling calls "generated income". It comes down yet again to total return. Generating income doesn't help you when total returns (performance) declines. The BMO covered call ETFs prove that the income from selling calls is offset by the decline in total return performance, which actually makes the investor worse off on a NET basis.
 

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I've been trying to learn what I can about a covered call retirement income strategy. To that end, this thread is interesting.


I sell puts on occasion, for companies I want to buy anyway. Because of this, I have been very pleased with the performance of this strategy, although the numbers are small compared to our portfolio so it isn't exactly a get-rich-quick scheme.

It seems that covered calls might be the complementary strategy during a retirement sell-down. I would only sell covered calls on stock I want to divest anyway.

I am not interested in holding an ETF such as QYLD. Calls will be covered in an un-registered options trading account.

To this end, I would appreciate information or thoughts on this sort of strategy. Thank you in advance!
I use a variety of option strategies. I think it is essential to have an ability to price and forecast volatility to consistently make money. Also have a point of value on how you expect the underlying and implied volatility to evolve over the holding period. Writing puts you probably know all this.

Turning to covered calls specifically; when you write a covered call you are selling off the return potential above the strike price. Important to be properly compensated for that. In my experience it is not a good strategy for juicing an exit price simply because the exit is not guaranteed to happen. Sure I keep the option proceeds but I still own the stock. More often than not I should have sold the stock back when I wrote the option, put the cash to work in a better idea and moved on. However, for a company that I own, like, and earn a divi, when implied vol is high I am happy to get additional cashflow writing covered calls.
 

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Covered calls seems like a make-work effort to me where one overcomplicates the investing experience. You make less money in more steps.

From what I have seen over the years, you never know when a stock is going to jump in value, and often times it never returns to the prior level. Covered calls means you miss out on those big gains when they do happen. If you are in it for the long run, I would say not bother. The 10 year history of covered call ETFs isn't encouraging either. Even in sell-down mode, I would just reduce my exposure. Stocks are risky enough that you need compensation, and reducing returns in an inherently risky market doesn't strike me as the best long term approach. You still have to eat a lot of downside risk.

Although I like and invest in dividend stocks and part of that is income-oriented, the vast majority of my returns have been capital gains. I have made about 10 times as much in capital gains as compared to dividends, while investing in dividend paying stocks.
 

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As an additional thought. A one trick strategy based only on covered calls is not in my opinion a viable and scalable investment strategy. There are times when it makes sense to write a call, and other times it does not. These ETFs need to do it all the time and it limits their returns. You as an individual have an edge if you are disciplined and only employ it when conditions are favourable.
 

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The only way this makes sense is to write the covered calls and if the shares get called away, you start writing naked puts on the same stock.

Would I do it?
No.

But if you're not selling the puts after you get called, then it really isn't adding much value.

At least if you start selling puts after being called away, it is "sort of" like if you never sold it (you're selling high and buyer lower).
 
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There are times when it makes sense to write a call, and other times it does not. These ETFs need to do it all the time and it limits their returns. You as an individual have an edge if you are disciplined and only employ it when conditions are favourable.
That's a good point about the ETFs having to do it all the time, even when it may not be optimal conditions.

On the other hand, I wouldn't want to try it myself unless I was an options expert. Trading options isn't easy, and there are a lot of things that can go wrong for an amateur.
 
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