Covered Call income ETFs vs DIY

[fenders53]

I know there is considerable interest in the covered call ETFs like QYLD-NUSI-JEPI etc.  I am interested as well.  I write options almost daily so I know the plan has some merit, but I am still skeptical for the following reasons.

-We can see the management fee, but I think there are fees "hidden" from the investor.  Actively managed funds have costs.  Active option funds have even more costs.  Fees I can avoid, and I'll share the costs in an example.  It would take about 30 minutes per month to execute the trades after some quick and uncomplicated math.

-My real cause for concern is I am not at all convinced these funds are any less dangerous in an abrupt down market.  And perhaps even worse in a protracted bleed out.  Fact is, I can't avoid that unless I spend money hedging every month.  I currently don't plan to do that.  That will be a "side stat" if I get scared and wish to try it.  An event like the first days of Covid might persuade me. Bottomline is the ETFs stifles your chances for gains and may offer no downside protection in return.  I don't like that plan.  It is caused by mechanically selling calls at the money.  I am going to sell them 2% out of the money.  We will see what yield this delivers but it seems close enough to what the ETFs pay out monthly.  I am not firm on the 2 %, but the math seems to work in the 1 1/2 or 2% range.        

So how will this work?  I need to lock in on some mechanical rules.  Not completely inflexible, but choice A or B given market parameters.  I can't just freestyle this or the comparison will be meaningless.  If I did it right now it would look something like the following.  (Keep in mind I have to hold 100 share lots).  I can't just nibble like I could if I bought the ETF.

I'll put details of sample trades in the next post......

[fenders53]

QQQ- Buy 100 shares at 398, so a $39,800 capital commitment.  I would sell the covered call 30 days out at strike 406 which is 2% out of the money.  The monthly premium received would be $415.  I will receive the small dividend.  We'll call it $40 per month.   The commission would be one dollar or less times a potential closing trade sp $2 /month.  Initial yield on this trade is 415+40-2 so $453.  So a 1.14% monthly yield.  If the QQQ runs through my strike my max profit is capped at an additional $800.  I would have to rebuy shares and repeat the process.  Similar to what a ETF does.  They actually use European style options which are not exercised prior to expiration.  They just buy them back at a loss if necessary and move on to next month.  If you held the ETF you get some portion of that $800 in share appreciation or larger dividend that month.

SPY- Buy 100 shares at 475, so a $47,500 capital commitment.  I would sell the covered call 30 days out at strike 485 which is 2% out of the money.  The premium received would be $230  I will receive the small dividend.  We'll call it $55 per month.   The commission would be one dollar or less times a potential closing trade so $2 /month.  Initial yield on this trade is 230+55-2 so $283.  So a  monthly yield og spt .53% a month.  So less appealing than QQQ but historically less volatile.  If SPY runs through my strike my max profit is capped at an additional $1000.  I would have to rebuy shares and repeat the process.  Similar to what an ETF does but they simply roll them and eat the option loss.  

IWM-(Russel 2000)-Buy 100 shares at 223 so a $22,300 capital commitment.  I would sell the covered call 30 days out at strike 228 which is 2% out of the money.  The premium received would be $265.  I will receive the small dividend.  We'll call it $17 per month.   The commission would be one dollar or less times a potential closing trade so $2 /month.  Initial yield on this trade is 265+17 so $282.  So a  monthly yield of about 1.26% a month.   If IWM runs through my strike my max profit is capped at an additional $500.  

 I'll give this some thought and probably launch a monthly round early next week.  I do a similar version of this with some of my individual stocks so I anticipate a somewhat less volatile outcome.           

One advantage I see is I will not be receiving my own capital back to pay a "dividend".  My shares will be worth exactly what the index shares are worth.  Potential for at least the same dividend as the ETF, with a chance of grabbing a little more capital appreciation.  We'll see how it goes.  It's far less complicated than it might sound.