Weekend Reading – Covered Calls Edition
Welcome to a new Weekend Reading post: the covered calls edition.
You can find some recent posts below before I get into my headline subject!
Wow, are these really the costs to raise children???
And…I recently posted my approach to keeping cash on hand, prior to semi-retirement and why I believe some form of a cash wedge is important to consider during retirement. Your mileage can always vary of course depending on your dependable income sources!
Weekend Reading – Covered Calls Edition
My goodness, there are just so many ways to invest!
As passionate readers of this site know by now, I/we employ a two-pronged, hybrid approach to investing:
- We own a number of Canadian dividend paying stocks for income and growth, you can read more about that on the dedicated My Dividends page here.
- And, beyond a few U.S. stocks, we continue to invest and own low-cost ETFs for extra diversification. I also have a dedicated My ETFs page for that.
By investing the way we do, we feel we get the best of both worlds:
- meaningful income, now, today, if we wanted to use it via dividends and distributions, and
- our collection of stocks and ETFs also delivers price appreciation over time, ETFs moreso, providing growth.
But certainly some investors invest very differently to meet their goals. I’ve mentioned that many times before on this site and I also mentioned as much during this recent TD webinar – stay tuned, recording to follow!
(In this recent webinar, I joined Adrian Starinieri from Passive Income Investing, and Henry Mah from Your Ever Growing Income to discuss the potential benefits of dividend investing as a way to build wealth compared to other investing strategies. I shared what works for me/us as a hybrid investor and how it likely differs from both Adrian and Henry.)
Using covered call strategies or at least covered call ETFs to juice income has been a very alluring income investing approach for many DIY investors. That’s good, to a point but to each their own since lots of financial engineering is involved.
Here is the covered call strategy in a nutshell:
- Call options are financial contracts.
- The contracts give the buyer the right, but not the obligation, to purchase a security at a set price.
- This set price is called the strike price.
A covered call gives someone else the right to purchase stock shares you already own (hence “covered”) at a specified price (strike price) and at any time on or before a specified date (expiration date).
So, covered calls can potentially earn income on stocks you already own.
Of course, there’s no free lunch: your individual stocks could be called away at any time during the life of the option.
You don’t have to perform covered calls with individual stocks of course. You can own funds/ETFs to do the heavy lifting for you. Those also come with caution IMO since any active money management comes with higher fees passed onto the customer.
Pros and Cons of Covered Calls / Covered Call ETFs
I don’t practice this approach nor do I ever intend to.
While there is the income upside to be had and that has major appeal to many, there are just too many drawbacks and variables for me since income/yield and price appreciation is always two-sides of the same investing coin.
Sure, some covered call ETFs offer great income but the total returns could be flat.
Case in point below. I know some covered call income investors have touted this covered call ETF below. Why not just buy and own the index instead?
Source: Portfolio Visualizer (disclosure: I own QQQ (blue line) and not QYLD).
As this Globe and Mail article so kindly expressed (subscription):
“Covered call ETFs create an alluring image of high income and low risk, but these perceived attributes are a sleight of hand in financial product design. The final blow, in my view, is their high fees and costs and unfavourable tax implications.”
Yes, there may be tax advantages to this investing approach within tax-deferred accounts specifically, and these strategies could be useful in flat or down markets, but last time I checked the stock market tends to go up more than down otherwise people would not be investing in it. 😉
Personal finance and investing is personal – make sure you figure out your plan, your “whys”, your investing goals and any related investing risk.
More Weekend Reading…
Yes, the 2023 Canadian Financial Summit is coming next week!
Yup, here it comes!
Once again, I’m honoured to share the virtual stage with 35+ Canadian experts for this Summit.
This virtual Summit continues to cut through the fog and noise of confusing financial jargon to help build your confidence needed to seize control of your personal finances. Each speaker has their own expertise to share. With their actionable words of wisdom, all speakers are here to support your money management and wealth-building progress in one spot!
Here is what you can expect this year:
- How to plan your own retirement at any age
- The Pension Paradox: Lump Sum vs Cash for Life
- How to save money on taxes by optimizing your RRSP to RRIF transition
- Plan your personalized combination of a DIY portfolio alongside an annuity for a customized stream of retirement asset growth + monthly income.
- How to maximize the new FHSA (First Time Home Savings Account)
- How to adjust for high interest rates in your portfolio and day-to-day life
- How to efficiently transition your investing nest egg to a steady stream of retirement income
- What Canadian real estate investments looks like in 2023
- How to deal with inflation on your bills and in your investment portfolio
- The best Canadian personal finance books of all time!
- When to take your OAS and CPP
- Travel for free with Canada’s loyalty rewards programs
Together, the entire panel of speakers have authored more than 100 personal finance books, hosted 600+ podcast episodes, written 20,000+ blog posts and newspaper columns, and have been featured in thousands of media articles and interviews from every news and financial publication in Canada.
How to Check Out The Canadian Financial Summit
In order to reserve your tickets, click this link and check out my talk!
When the Summit starts, you’ll be sent an email each day with the link to the sessions that go LIVE for the next 48 hours.
That’s it. There’s no paperwork. No need to put in payment information that you have to cancel later. No worries.
This year’s Summit kicks off with a webinar on October 18th and once again, is absolutely FREE to view for that weekend.
If you want to check out the videos after the free window has passed (and get access to a whole smorgasbord of bonus resources and video sessions) then you’ll want to sign up for the low-cost All Access Pass.
A reminder not to miss out on the Early Bird Pricing, as the price jumps up as the Summit begins so register early…
How Do You Sign Up?
Again, click here and sign up and the folks at the Summit will get you ready to roll.
P.S. A BIG thanks to all of you who have shared this event with your friends and family since I’ve been doing my own Summit talk some six+ years ago!
In other reading news and links I’ve been checking out…
“The stock market is the only market where things go on sale and all the customers run out of the store….” – @cullenroche