We are Chris, Tea and Neville of WealthBar (a robo-advisor). AMA.

I disagree that covered calls are a conservative strategy. They are often perceived as conservative and sold as so by brokers. Witness the two different levels of approvals required to be short naked puts and be short covered calls. One your broker thinks is risky and the other they think isn't.

Your point about potential negative liability is misguided. It is true that you could never have unbounded liability with a covered call. The most you could lose is your entire investment because a stock could go to zero.

The EXACT same is true with a short put. You never have unbounded liability (as you do with many derivative products; such as selling a call to finance buying a put). Being short a naked put the MOST you can ever lose is the strike of your option (less the premium).

In both scenario's the maximum loss you have exposed yourself to is the value of the stock (assuming you sold an at-the-money put). Thus; if you work out the details; the two strategies (short puts and covered calls) become mathematically the same.

boldIt is a basic truth of options math: if you wouldn't be short outright puts you have no business being buying a covered call fund. bold

I still fail to understand how you can recommend this product. I think we can agree that covered calls are the same as short puts. Can you elaborate why you think they are appropriate? The owner of the fund has 100% downside with minimal upside unless the market does nothing. The owner of the fund is actually short volatility and makes the maximum return in very small price moves of the underlying. This is the exposure a trader is looking for; not an investor.

An excellent (I did not write it; and some might find the tone a bit harsh) description of the similarity can be found at:


/r/PersonalFinanceCanada Thread