# Selling Covered Calls in RRSP/TFSA



## killuminati (Mar 14, 2011)

Is anyone here familiar with using a covered call strategy to boost your investments?

Say you are sitting on 1000 shares of one of the couch potato ETFs. Does it make sense to sell 10 calls in this scenario for a boost? Volatility tend to be lower, but at the same time the premiums are pretty low too, once you minus fees maybe it's not worth it. If you get called, you make the gain as long as you are smart about being OTM. In a downturn you make those little premium gains while the stock goes down.

It's something I am just starting to learn about and I'm curious if people are out there writing these calls.


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## goldman (Mar 18, 2017)

The covered call strategy can be a good way to boost your monthly income, especially if you anticipate the underlying index / stock to trade sideways so you're not missing out on too much of the price gains on the upside potential you're selling off with the call. 

I often sell covered calls on the US stocks and indexes. I can do this for low fees on US stocks, and there's lots of underlyings which have a liquid options market. But the biggest issue for me for why I don't do it yet with Canadian stocks on the TSX is TD charges an absurd assignment fee if the stock is called away. Also the Canadian options market is far less liquid. If you wish to get into selling covered calls on TSX stocks I recommend looking at Interactive Brokers which doesn't charge an assignment fee from what it looks like to me. 

If you like the concept but wish to have someone else do it for you for a small Management Expense Ratio, there's a few ETFs in Canada that sell calls against the bank and utilities etc


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## humble_pie (Jun 7, 2009)

it'll work. When premiums are low (low vols) the call seller should go farther out in time. Yes, this increases the risk of assignment. Best way to avoid assignment is to sell strike prices fairly far OTM.

when premiums are pitiful for those OTMs, a useful strategy is to sell strangles. These are a pair of OTMs, an OTM call plus an OTM put. Alas the put side cannot be done in registered accounts; but the strategy works well in non-reg'd. After all, in a strangle, only one side has the potential to get into any kind of trouble. The other side will be money in the bank.

re the big green's flat assignment fee of $43, this actually is fairly reasonable. Try other brokers & you'll find full agent-handled base charges for assignments plus horrific fees per share. A 1000-share assignment could end up costing $80-99. It's true that IB clients have got a terrific deal.

think or swim used to have a one-penny fee for closing an OTM contract during the last week of its life. The american name for this one-center is a "cabinet trade." caused some confusion in quebec where it was referred to as "le placard."


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## james4beach (Nov 15, 2012)

killuminati said:


> Is anyone here familiar with using a covered call strategy to boost your investments?


Something to consider is that it doesn't boost your return from the perspective of boosting the total $ you gain. Instead it trades off one type of gain (capital appreciation) for another (immediate income).

As an illustration of this, look at BMO's very popular covered call ETFs such as utilities covered calls ZWU, compared to a straight utilities ZUT. When counting total return, which calculates reinvestment of all distributions to give a fair measure of overall (total) return, the 5 year annualized return of the covered call strategy was 2.95% per year. Investing purely in ZUT returned more, 5.94% per year.

This is an example of a covered call strategy that did the opposite of boosting returns. The shift towards immediate income resulted in a significant loss of the longer term capital appreciation.

So you should think back to your primary objectives. If the main objective is to create more income cashflow, then this strategy can do that. If the main objective is to make the most money long term, it won't do that.

(Same is true for dividend investing by the way. High hividend strategies are a great way to extract more cashflow right now, but they don't increase the total return or total $ made, _even when_ dividends or covered call income are reinvested)


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## humble_pie (Jun 7, 2009)

james4beach said:


> Something to consider is that it doesn't boost your return from the perspective of boosting the total $ you gain. Instead it trades off one type of gain (capital appreciation) for another (immediate income).
> 
> As an illustration of this, look at BMO's very popular covered call ETFs such as utilities covered calls ZWU, compared to a straight utilities ZUT. When counting total return, which calculates reinvestment of all distributions to give a fair measure of overall (total) return, the 5 year annualized return of the covered call strategy was 2.95% per year. Investing purely in ZUT returned more, 5.94% per year.
> 
> ...





wondering why u are shifting the topic from a personal covered call strategy to the very questionable institutional option ETFs?

they are apples & oranges. I don't know of any successful so-called professionally-run option fund. Most are visibly unsuccessful. The reason is they are run by recent finance grads w loads of theoretical knowledge, too much greed & zero practical experience trading options. Almost without exception, they sell options that are far too close to the money, for the simple reason that the premiums these receive are higher. For the first few months or even a couple of years, things look fine.

but the option sales trigger assignments. Then the fund's legal mandate requires the baby managerlets to re-invest in the same securities, except they can only purchase fewer of them. 

the result is self-cannibalization of capital. In a rising bull market such as the past decade, the fund will inevitably underperform.

i've explained this defect time & time again. The classic example is Div-15, which survives by issuing new treasury shares (ie it's a ponzi scheme.) Horizons' original 30-stock canadian fund with US options was another self-consuming disaster, because the fund managerlets had to keep on investing in fewer & fewer quantities of the same 30 stocks.

none of the greedy fund disasters have anything to do with personal option strategies. A covered call strategy in the hands of an intelligent retail investor will return a stream of small capital gains (jas4 is quite wrong in calling these income), as long as investor sells OTM options that are outside or near the extremity of the projected trading band. In other words, he's disciplined. Greed plays no part.


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## james4beach (Nov 15, 2012)

I assumed the covered call ETFs were using a strategy similar to what the OP asked about. I didn't realize they were so different than writing covered calls in a personal account.


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## humble_pie (Jun 7, 2009)

james4beach said:


> I assumed the covered call ETFs were using a strategy similar to what the OP asked about. I didn't realize they were so different than writing covered calls in a personal account.



i think you might still not be getting the difference

it's a question of greed. An individual seller of covered calls can be far too greedy, he will be assigned frequently.

a difference here is that the institutional option funds are nearly always restricted to a fixed list - sometimes even identified in prospectus - of underlying stocks whose options their managers are permitted to sell. When assignment occurs the managers have no choice. They must re-buy the same securities. Their critical problem is that the market price of these securities - by definition - is now higher than the price they received in the assignment; so they can only buy fewer shares. In a steadily rising market this entrains the cannibalization feature. They devour their own capital.

such misfortune doesn't happen in a long-term falling market. But we've seen nothing but rising markets for the past 10 years, which is when all these funds debuted.

a small retail option trader is not restricted at all as to what he might do with proceeds of assignment. He can even choose to abandon options altogether ... something the fund cannot choose to do.

from my perspective, i think it's a grave error to ever hire or pay or allow anybody else to trade one's options. One either has to learn how to do it oneself or else ignore the sector entirely.


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## killuminati (Mar 14, 2011)

Highly informative posts everyone!

The more I look at it, the more it doesn't make as much sense _for me_. The true OTM options pay very little and if they get assigned the fees basically eat up all your gains.

I guess options should be left to the hedgers and the gamblers.


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## humble_pie (Jun 7, 2009)

killuminati said:


> The more I look at it, the more it doesn't make as much sense _for me_. The true OTM options pay very little and if they get assigned the fees basically eat up all your gains.



as mentioned above, in cases of low vol low premium, an option seller needs to go farther out in time, in order to capture adequate premium. Right now expiration in january 2020 would be appropriate ...

a common strategy is to sell both OTM calls plus OTM puts, however the minister of finance does not allow uncovered puts to be sold in registered accounts.

one might initially be reluctant to sell long-term but the process has some similarities to building a 5-year GIC or bond ladder. It takes a few years to get the entire machine up & running. In the end - as with ladders - the short option seller will have staggered series of expiration dates that keep maturing frequently.

it is true that some underlyings have options but the options are not interesting. Your ETF might be one of these. What i do in such cases is avoid such an underlying altogether.

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