Covered Call ETFs are actively managed ETFs that go long stocks and simultaneously short call options on the stocks to maximize return. These structured financial products allow investors to generate income from the collection of call options premiums and any dividends received from the underlying stocks.

What is a call option?

A call option is a financial contract that gives its buyer the right, but not the obligation, to purchase the underlying asset at a pre-specified price and time. The pre-specified price is the option’s strike price while the expiration date sets the option’s time to maturity. Exercising the call option means that the buyer used their right to buy the asset at the strike price. To obtain this right, the buyer pays a premium to the seller. The seller keeps the premium irrespective of whether the option is exercised or not.

Covered Call Strategy

This strategy involves buying shares of a stock and then writing call options contracts against all or some of the purchased shares. The investor writing call options should own an equivalent amount of the underlying shares. Being a conservative strategy, covered calls can provide a level of insurance against market troubles. In a bear market, the collected call options’ premia create a buffer, and losses are reduced by the premia. In a bull market, when the price increases beyond strike price it means that the call will be exercised, and the shares will need to be delivered to the option buyer. The portfolio will have a capped price appreciation. Covered call strategies work best for neutral or sideways markets. This is where no major price movements are expected, and the call options’ premia create additional sources of income for the investors.

Covered call strategies were once exclusive to options and derivatives traders. With the introduction of covered call ETFs, investors are now able to overcome the complexities of picking individual securities and managing corresponding call positions. These ETFs bundle different securities and calls together in a single basket. The basket trades on a stock exchange, under a ticker symbol, allowing investors a simple and easy way to include this strategy in their portfolio.

Trackinsight’s data reveals that the structured products ETFs assets under management reached CAD$14.16 billion. There are 82 different structured products ETFs listed and trading in Canada. Out of those, 65 were covered call ETFs managing CAD$13.30 billion in AUM.

Source: NEO, “Covered Call ETFs to Enhance Portfolio Income”, February 16, 2022. Accessed March 2, 2022.


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