What’s Your Income Plan?

What’s Your Income Plan?

For just the fourth time in 50 years, the S&P 500’s (NYSEARCA:IVV) dividend yield was briefly more versus 10-year U.S. Treasuries (ChicagoOptions:^TNX). It’s another testament to the difficult climate facing bond investors (NYSEARCA:BOND) who want to generate a respectable level of income.

For good reason, more people are employing alternative income strategies like selling covered calls.

The covered call technique (also known as a “buy-write strategy) happens when an investor buys a stock or ETF and sells (or writes) call options on the underlying or covered position. The strategy can be used to enhance portfolio returns via income and even reduce market volatility.

(Audio) Portfolio Report Card: Analyzing and Grading a $818,000 Investment Account

BXM v. SP 500

The CBOE S&P 500 BuyWrite Index (NYSEARCA:BWV) is a benchmark linked to the performance of a hypothetical buywrite strategy on the S&P 500. The BuyWrite index was released in 2002 and is based on (1) buying an S&P 500 index portfolio, and (2) writing the near-term, at-the-money S&P 500 “covered” call option, generally on the third Friday of each month. The premium collected from the sale of the call is added to the portfolio’s total value. The call is held until expiration, typically the third Friday of the following month, at which time a new one-month, at-the-money call is written. If exercised, the expired option is settled in cash.

No income strategy, whether it’s investing in dividend paying stocks (NYSEARCA:DVY) or selling covered calls is perfect.

Nevertheless, selling covered calls is a proven long-term income strategy. Since inception in Feb. 2012, our Income Mix ETF Portfolio has generated $29,354 or $838 per month. The portfolio uses a disciplined but simple covered call approach on an all ETF portfolio.

Additionally, the risk-adjusted performance of the BuyWrite index versus the S&P 500  has been superior.

Since it debuted in 2002, the BuyWrite index has generated a performance return comparable to the S&P, but with substantially less volatility. (See chart above)

An 18-year study (1988-2006) by Callan Associates showed the BuyWrite Index delivered a compounded annual return of 11.77% compared to 11.67 percent for the S&P 500. The BXM returns were generated with a standard deviation of 9.29%, two-thirds of the 13.89% volatility of the S&P 500.

Follow us on Twitter @ ETFguide

Suggested Reads:

2 comments on “What’s Your Income Plan?
  1. Jay says:

    Hey, Ron,
    Sorry I have been away from the site. It was Mardi Gras season here in New Orleans and I get busy entertaining friends.

    Gosh, for as many great trade ideas and articles as you write here and in our subscriber material maybe the best was getting me interested in the income potential of option strategies like covered calls, cash covered puts, credit spreads and sometimes even condors now that I am retired and have made these strategies a hobby.

    Even something as simple as holding a portfolio of the Dividend Aristocrats and REITS that have sufficient open option interest to write covered calls against in the months they do not pay dividends can easily triple your yield or more without additional risk. In fact you take on less risk because the covered call premiums become loss protection if your stocks go down.

    So there is always something for everyone at ETFG! Thanks as always for the help. – Jay

    • Ronald Delegge says:

      Great to hear from you again Jay and 100% agreed on the various income strategies using options you mentioned. Great idea about selling covered calls on the months dividend ETFs don’t pay out. I hope retirement is treating you well.

Leave a Reply

Your email address will not be published. Required fields are marked *


One FREE Month of ETF Premium

Click the report icon to sign up and receive one FREE month of ETF Premium Membership.

Show Buttons
Hide Buttons

Get One FREE Month of ETF Premium

Simply provide your email address and we'll give you One FREE Month of ETF Premium!