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The Great American Covered-Call Scam

Logan Kane profile picture
Logan Kane


  • Covered call strategies are heavily marketed by financial advisors but fail to improve returns.
  • Using buy-write/covered call strategies limits your upside and does a poor job of protecting against market crashes compared to bonds.
  • Covered call strategies are disastrous from a tax standpoint.

Using a buy-write/covered call strategy is a common pitch from stockbrokers who promise their customers that they can boost their returns with little risk. ETF providers also offer covered call funds such as the Invesco S&P 500 Buy-Write ETF (NYSEARCA:PBP) to track the long-running fad. Both approaches are bad ideas. When you drill down into the data, selling covered calls dramatically underperformed a plain-vanilla S&P 500 (SPY) portfolio over the last 10 years, as well as the theoretical Buy-Write Index (BXM), which conveniently ignores transaction costs. Additionally, if you carry out a covered call strategy in a taxable account, you are in essence converting much of your tax-deferred capital gains into taxable ordinary income. This nearly doubles your tax-rate and destroys your returns in the process.



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This is the price change for the S&P 500 versus the PBP over the last 10 years. The S&P 500 goes up over time, whereas the PBP goes pretty much sideways. To be fair, this graph ignores dividends and distributions, but even when you account for them, over the last 10 years, PBP still only returned 4.75 percent per year, versus 10.17 for the S&P 500.

But aren't options overpriced?

The thesis for buy-write funds and ETFs is simple. Research shows that options are somewhat overpriced compared to historical volatility. In theory, you should be able to use this to pocket market-beating returns by selling covered calls.

However, options pricing models ignore the fact that stocks (which drive options prices) are more likely to go up rather than down over time. This means that puts tend to be overpriced relative to calls, and selling calls without owning the underlying stock/index is likely a money-losing strategy over time.

This creates a paradox in options pricing. The prices for puts and calls need


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This article was written by

Logan Kane profile picture
Author and entrepreneur. My articles typically cover macroeconomic trends, portfolio strategy, value investing, and behavioral finance. I like to profit from the biases and constraints of other investors. Paywalled articles are available along with 1,000+ other authors by subscribing to Seeking Alpha Premium.You can read some more of my work for free here on my Substack.

Analyst’s Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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