Hello everyone! I hope your weekend is off to a great start. After my last post discussing JEPI & JEPQ I started to think about the potential pros & cons to covered call ETF’s. Notably, why an options trader may choose to relinquish control over there covered call income to an investment fund.
So, in today’s post we’re going to look at exactly that, the pros & cons to covered call ETF’s.
Let’s get into it.
Covered Call ETF (JEPI & JEPQ) – Pros
- No management
- No experience required
- Lower capital requirement
After considering the potential benefits to covered call ETF’s, this list reflects my top 3 reasons why they could make sense.
First, there is something to be said about just investing the money and letting trained professionals handle the mundane task of position maintenance. There are of course trade offs to this, but if the saying, “time is money” is to be believed then not having to spend any time has to be a benefit.
Next, if you’re capable of hitting the confirm and send button then with JEPI & JEPQ you’re capable of earning income with options. Just like buying Apple stock, you decide how many shares you want and place the order, it’s that simple. You won’t need any special knowledge or skills to earn a respectable yield.
Finally, and this could have easily been number one on the list, JEPI & JEPQ have no capital requirement. At minimum, you would have to commit the cost to buy one share to begin receiving an income. Sure, with only one share the income wouldn’t amount to much but the point remains, it takes far less capital with JEPI & JEPQ than the traditional covered call strategy.
Covered Call ETF (JEPI & JEPQ) – Cons
- Less income
- Underperforms the Underlying
- Less control
The first one is obvious in my opinion, and it is also a by product of the third con on our list. However, income is the name of the game so having less of it means it’s number one on our list. Regardless, investing in JEPI & JEPQ means letting those funds decide the level of income.
Equally as obvious to those familiar with the covered call strategy would be the market under performance. By selling the call option, the upside is capped at the selected strike price. And while it isn’t very clear from the JP Morgan ETF page how they select their covered call levels we can be sure the cap is there. Meaning, JEPI & JEPQ would miss any upside above the selected cap.
Lastly, with less control means we forfeit the very essence of options trading. At their core, options are designed to provide more control and the ability to capture the benefit of specific outcomes. Owning JEPI & JEPQ essentially means we don’t want that level of control. It isn’t necessarily a bad thing but it is a con for someone more than capable of completing a covered call strategy.
Wrapping Up
As you can see, there are clear pros & cons to covered call ETF’s.
If you’re versed in options and have the capital available then I can’t say they make the most sense. Without a closer look, it seems fairly obvious that just constructing our own covered call strategies would provide more income and more upside control. Further, relinquishing our capital to JEPI & JEPQ means we become bound by their policies and procedures. All of which may not have our best interest in mind.
On the other hand, should you just want a set it and forget it approach then covered call ETF’s are a clear winner. They open the door for novice or busy investors to capture all the benefits of options without their intricacies or management requirements. Moreover, professional investors are at least monitoring the market. They may not know which way it’s moving but they are at least looking at the data points to make decisions. All while we sit back and collect that income.
In the end, it comes down to each individual investor. Do you want the easy approach or do you want the best approach? Either could make sense or both could make sense at various times in life. Over worked for a period, let JEPI & JEPQ do the heavy lifting. More free time available, then up the ante and the income. It’s all up to you.
God bless,
Jeff
