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Why Covered Call ETFs Under-Perform

With the popularity of covered call writing and selling cash-secured puts growing in popularity, we have witnessed the creation of new exchange-traded funds based on these strategies. Over the last few years I have not been a proponent of these securities mainly because they under-perform the overall market and motivated retail investors can do so much better on their own. In today’s article I will examine two of the newer covered call and put-selling ETFs, QYLD and HVPW. First,  some explanations of the ETFs to be evaluated and the benchmarks we will use for comparison:



The CBOE S&P 500 BuyWrite Index (BXMSM)

The CBOE S&P 500 BuyWrite Index (BXM) is a benchmark index designed to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. The BXM is a passive total return index based on:

(1) Buying an S&P 500 stock index portfolio, and

(2) Writing (or selling) the near-term S&P 500 (SPXSM) “covered” call option, generally on the third Friday of each month. The SPX call written will have about one month remaining to expiration, with an exercise price just above the prevailing index level (i.e., slightly out-of-the-money). The SPX call is held until expiration and cash settled, at which time a new one-month, slightly out-of-the-money call is written.

S&P 500

An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. It is generally considered a reliable reflection of the overall stock market or its benchmark.



The Recon Capital NASDAQ 100 Covered Call ETF (QYLD)

QYLD is the only ETF that utilizes a buy-write strategy based on the NASDAQ 100. It seeks to provide investment results that will closely correspond, before fees and expenses, generally to the price and yield performance of the CBOE NASDAQ-100® BuyWrite Index (BXN). It is a passive total return index based on:

(1) Buying a NASDAQ-100 stock index portfolio, and

(2) Writing (or selling) the near-term NASDAQ-100 Index (NDX) “covered” call option, generally on the third Friday of each month. The NDX call written will have about one month remaining to expiration, with an exercise price just above the prevailing index level (i.e., slightly out-of-the-money). The NDX call is held until expiration and cash settled, at which time a new one-month, slightly out-of-the-money call is written.


ALPS U.S. Equity High Volatility Put Write Fund (HVPW)

HVPW is an income-generating fund that creates income by selling 2-month 15% out-of-the-money puts (lower than current market value) on 20 diversified stocks with high implied volatility. The fund is fully collateralized by short-term 3-month T-bills.


Next let’s set up a chart showing the returns of the 2 benchmarks and the 2 ETFs over a 6-month time frame:


covered call writing exchange-traded funds

Covered call writing and put-selling ETFs vs market benchmanrs


Why these ETFs underperform

During this time frame, both ETFs under-performed both benchmarks significantly. Let’s examine some of the reasons for these lower returns:

Fees and expenses

We would expect the costs to participate in the ETFs to result in a return of least 1% lower than the benchmarks.

Selection of the underlying securities

In the case of QYLD, all 100 stocks from the Nasdaq 100 are included in the portfolio. If we were to develop our own portfolio, we could select only the best-performers from this group and the ones that generated the returns that met our goals rather than accepting all securities simply because they were members of this index. For HVPW, high-volaility stocks are stresses which may or may not be appropriate to maximum strategy results as an additional layer of risk is introduced.

Only out-of-the-money strikes utilized

Slightly out-of-the-money strikes are great because they allow us to generate two incomes streams in the same month with the same stock and cash: one from option profit and the other from share appreciation up to an out-of-the-money strike. However, there are times when an in-the-money call strike is more appropriate or a deeper out-of-the-money put may be a better choice. I am referring to bear or volatile market conditions which may dictate a more conservative approach to covered call writing or put-selling to afford us more downside protection. Similarly, in a raging bull market, we may want to utilize a deeper out-of-the-money call option or an in-the-money put option to generate even higher returns. The main point here is that having more strategy flexibility will allow retail investors to generate much higher returns than a rigidly-structured ETF.

No position management strategies

Eliminating the use of exit strategy opportunities and position management techniques is a major flaw with these ETFs when comparing the strategies to how we, as retail investors, can manage them. We can take action to enhance profits to even higher levels when share price increases and also take action to mitigate losses when share prices declines.



Covered call writing and put-selling ETFs allow us to participate in low-risk option strategies without having to take the time and effort to learn and manage the strategies ourselves. However, because of fees, expenses, lack of strategy flexibility and no position management components, the results will far under-perform both the market benchmarks and the even higher returns that can be achieved by elite covered call and put-writers.

Next live seminar

American Association of Individual Investors: Philadelphia Chapter

Blue Bell, Pennsylvania (please note the venue change)

Tuesday September 30th

Click this link for more information

It was wonderful seeing our BCI members who attended my presentations in Wisconsin this past week…thanks for coming.

Market tone

This was another light week of economic reports highlighted by the FOMC meeting which seems to be focusing mainly on the labor market as our economy continues to recover:

  • The Fed policymakers stated it would continue its policy of low interest rates for a “consideerable time” with the caveat that if the economy shows increased improvement in the labor market those rates may begin to increase sooner
  • According to the Federal Reserve Board, Industrial Production (a measure of the changes in quantity of physical materials and items produced in the manufacturing, mining, and utilities industries) in August declined by 0.1% and output was down 0.4%
  • New home construction was down 14% from July but was up 8% year-over-year
  • According to the Labor Department, initial jobless claims for the week ending September 14th came in at 280,000, below the 305,000 expected
  • According to the Conference Board, the leading economic indicators for August were up 0.2%, below expectations
  • The Consumer Price Index, the CPI ( a widely followed indicator of inflation. The CPI is a measure of the average change over time in the prices paid by urban consumers for a fixed market basket of consumer goods and services) declined by 0.2% in August and has been up 1.7% year-over-year, below the Fed’s target inflation rate of 2%

For the week, the S&P 500 rose by 1.3%, for a year-to-date return of 10%, including dividends.


IBD: Confirmed uptrend

GMI: 5/6- Buy signal since market cl0se on August 15th, 2014

BCI: Moderately bullish favoring out-of-the-money strikes 2-to-1

Wishing you the best in investing,

Alan ([email protected])


About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

14 Responses to “Why Covered Call ETFs Under-Perform”

  1. Barry B September 20, 2014 11:34 pm

    Premium Members:

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor premium member site and is available for download in the “Reports” section. Look for the report dated 9-19-14.

    For your convenience, here is the link to login to the premium site:

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:


    Barry and the BCI Team

  2. Gregg September 21, 2014 10:57 am


    I’m a new member and also new to options trading. I’ve traded stocks and ETF’s for nearly 40 years but really only started “active” market neutral trading about 3 years ago. I’ve watched all the BCI beginners series as well as several others. You are an excellent teacher…very clear and easy to follow.

    My intention at this point is to sell covered calls against a fixed portfolio comprised simply of QQQ and IWM. I’ve noted that you seem to do this for your mom and other family members. I’ve been using the Weeklies for the last two weeks and generating premium at the rate of about 2.5% per month. If this is what I can expect going forward, I’ll be a very happy camper indeed!

    My question is in regard to rolling down. I’m just having a little trouble getting my head around what happens when we sell calls with strikes well below our basis in the underlying and then the market jumps significantly higher before expiration? If the stock (ETF) is called early, that obviously means selling low and buying back in at a higher price if we want to continue the strategy in the same market. Is that how you do it? What are the long term effects of these potential outcomes to the strategy of selling against a fixed diversified portfolio? Is there a video addressing this?

    Thanks for your time,


    • Alan Ellman September 21, 2014 11:11 am


      Thank you for your generous comments.

      Covered call writing is a strategy that can be crafted to the specific needs and trading styles of each investor. Most of the material I present is for traditional covered call writing where portfolios turn over significantly each month, mainly due to the avoidance of earnings reports.

      Your situation is slightly different and falls under the category of “portfolio overwriting” where you plan to keep the underlying securities for the long term and so exercise is something you hope to avoid. I discuss portfolio overwriting in chapter 14 of the “Complete Encyclopedia…” and recently wrote a new seminar dedicated to it.

      For portfolio overwriting you will favor out-of-the-money strikes and only roll down to an out-of-the-money strike. I must say that a goal of 2.5% will be difficult in an environment where you also want to avoid exercise. To accomplish this, you will write near-the-money (but slightly OTM) strikes and roll options when needed. Keep a close eye on ex-dividend dates and avoid early exercise by writing calls after the ex-date when he time value of the premium is < the dividend about to be distributed. there's more to it than this space allows. Perhaps I'll create an Ask Alan video on this topic. Alan

  3. Carlos September 21, 2014 2:09 pm

    Hi Alan,
    While my covered call options with stocks have been performing amazingly well over the last 8 months, I have been paper trading with ETFs and the results for me have been really bad. I have been selling options for OIH, EWZ, EEM, RSX, USO, EWW, VWO…..looking for returns of 1-2% (monthly options). I understood that the lower returns were associated with lower volatility, but in the ETFs mentioned the volatility was higher than in options with stocks (also the candlesticks didn’t show a continuous trend, instead they were full of gaps).
    Am I missing something? On your videos you talk about using ETFs for your mother’s portfolio with a goal of 1-2%, but I understood this meant less volatility, and prices more predictable. Am I just choosing the wrong ETFs or is there something else I am not seeing?

    • Alan Ellman September 21, 2014 5:31 pm


      You are correct in assuming that ETFs, generally, have less volatility than individual securities and that is one of the reasons they are more appropriate for ultra-conservative option traders and for bearish markets. However, there are some ETFs with very high implied volatility and those should be identified prior to entering a trade. One way to locate these higher-risk underlying securities is based on the option returns. I set a goal of 1-2%/month for CCs in my mother’s account for ETFs for initial returns. I will genreally avoid an ETF that generates > 3%/month for a near-the-money strike in her account. I am more aggressive in my cc accounts.

      If you are a premium member, we provide implied volatility stats for our members on all eligible ETFs. For example, the IV for the S&P 500 currently is about 11. A great-performing ETF, ASHR, has an IV of almost double that figure. Depending on your risk-tolerance and market assessment ASHR may or may not be appropriate in your portfolio.


      • Carlos September 23, 2014 2:16 am

        Thank you very much Alan! I am a Premium member. On the ETFs I mentioned, I set a goal for 1-2%, that is why I am surprised that my trades so far are doing so poorly compared with stocks, and that many times there are big gaps on the price. ..shoud I conclude that I am not chosing wisely the ETFs because when I set a goal of 1-2% the volatility shold be lower and the trends more predictable?

        • Alan Ellman September 23, 2014 7:06 am


          I would take advantage of the implied volatility stats we provide in our ETF Reports. For example, with the IV of the S&P 500 @ 11, OIH has an IV of 21 and RSX @ 29. With the IV of these securities double and triple that of the overall market, they may not fit the profile of a conservative portfolio. Also,with the very recent geo-political events creating global uncertainty, taking a more defensive posture (moving to ITM strikes) may be a consideration as well. Of course, we must always be prepared with our exit strategy arsenal.


          • Carlos September 23, 2014 12:52 pm

            Thanks Alan!

  4. Gregg September 23, 2014 10:24 am


    When writing on a fixed portfolio such as the ETF’s that you have said you use in your mother’s account, do you always role the options prior to expiration or are there times when it makes more sense to allow assignment in order to capture some appreciation on an out of the money strike and then enter a fresh buy/write in the same security?


    • Alan Ellman September 23, 2014 11:31 am


      We roll our options when the strike price is in-the-money (say a stock is trading @ $52 and the strike sold was $50). As a result we will capture appreciation to the strike either way. At that point you can make the determination if you will take a more bullish “rolling” stance and sell the next month higher strike (roll out and up) to let’s say the $55 strike, thereby capturing the additional $2 of share appreciation at that point in time ($50 to $52). If you decide to simply roll out to the $50 strike, the $2 represents downside protection of the time value credit.

      If you buy back the option and then re-purchase the stock the following week, your cost basis will be $2 higher…no benefit there and there will be one additional commission.

      Bottom line: If the strike is ITM and you want to keep the security in your cc portfolio, roll the option to the same strike (conservative) or a higher strike (more bullish).


  5. Dave September 23, 2014 12:27 pm


    Do you have a tranche invested each week or do you wait until your 30 day options expire and then invest again? Or is it a rolling thing, where you’re doing it every week with a series of stocks. I’ve noticed that some optionable stocks are only available every 30 days not Week 1 or Week 2 like some others.


    • Alan Ellman September 23, 2014 12:38 pm


      I do not because I have had my success trading monthly options and undertaking 4-5 week obligations. Because of the nature of theta (time value erosion of our option premiums), it is best to enter trades near the start of the monthly contract with the exception of some exit strategy executions.

      Now stocks and ETFs that have options associated with them all have monthly expirations but a smaller but growing percentage also have weeklys. Using weeklys will fit with the strategy you describe as long as you master the pros and cons of weeklys and feel it meets your investment style.

      There are many ways to generate income with stocks and stock options…my way isn’t the only way.


  6. Alan Ellman September 24, 2014 5:41 pm

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.

    For your convenience, here is the link to login to the premium site:

    NOT A PREMIUM MEMBER? Check out this link:

    This Tuesday, September 30th I will be in the Philadelphia area for a live seminar:

    I’d love to meet as many BCI members as possible.

    Alan and the BCI team

  7. Alan Ellman September 25, 2014 8:05 am

    Running list stocks in the news: AMBA

    Ambarella makes chips, many of which are found in the popular Go-Pro cameras. On September 4th, AMBA reported its 5th consecutive stellar earnings report and another positive “beat” Also, revenue estimates were raised to 32% greater than the current report and 21% ahead of analyst’s estimates.

    Our premium running list shows that AMBA is in the “Chips” industry currently ranked “A”, has a next projected ER date of 12/4/14, a beta of 2.29 (high historical volatility accounting for high option premiums), weekly options available and adequate open interest for near-the-money strikes. The chart below reflects the strength of recent earnings reports and earnings estimates. CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.