Domestic Covered Call ETF Strategy Comparison: Daily/OTM/Target Selection Guide
Domestic Covered Call ETF Strategy Comparison
Covered Call ETFs, which garner attention for their high distribution rates, are evolving beyond simple monthly dividends into a variety of strategies. This post analyzes key strategic elements, including option expiry (Daily/Weekly), strike price (OTM), and target distribution rate (Target), to present criteria for selecting stable monthly dividend investments.
Domestic Covered Call ETF Strategy Comparison: Selection Criteria for 2nd Generation Covered Calls Beyond Monthly Dividends
1. The Basic Principle and Dilemma of Covered Call ETFs
The Covered Call strategy involves buying an underlying asset (stock or index) and simultaneously selling a Call Option on that same asset. The advantages and disadvantages of this strategy are clearly distinct.
- Main Advantage: By selling call options, a stable income called the option premium can be secured monthly or weekly. This is highly advantageous for generating distributions (cash flow) in sideways or gently declining markets.
- Main Disadvantage: Due to the option sale, if the underlying asset rises sharply, the excess profit must be forfeited, resulting in a structural dilemma where the upside potential is capped.
To address this drawback—the inability to fully capture profits in a rising market—ETF managers have recently been introducing various Strategic Variations.
2. Analysis of the 3 Major Evolution Strategies of 2nd Generation Covered Call ETFs
An analysis of the domestically listed Covered Call ETFs provided shows that fund managers primarily differentiate their products by adjusting the option's expiry (maturity date), strike price, and distribution rate target.
2.1. Option Expiry Strategy: Daily vs. Weekly
Shortening the option's expiry is the biggest recent change in the Covered Call ETF market.
| Category | Daily Option Selling Strategy | Weekly Option Selling Strategy | Monthly Option Selling Strategy |
|---|---|---|---|
| Expiry Cycle | Sell and expire Daily option | Sell and expire Weekly option | Sell and expire Monthly option |
| Premium | High (Faster time value decay of the option) | Medium | Low |
| Upside Potential | High (Shorter expiry means higher chance of call option not being exercised during a sharp rise) | Medium | Low (General Covered Call) |
| Representative Products | TIGER US Nasdaq 100 Target Daily Covered Call | KODEX 200 Target Weekly Covered Call | TIGER 200 Covered Call |
Specifically, the Daily option selling strategy collects the option premium every day. Due to the short expiry, there's a higher probability that the call option will not be exercised during a sharp stock price surge, providing an opportunity to sell options at a higher price the next day. Consequently, it has the potential to improve profit-tracking ability in a rising market compared to general monthly option products.
2.2. Strike Price Strategy: ATM vs. OTM
The character of the ETF changes significantly depending on where the option selling price, or Strike Price, is set.
- ATM (At-The-Money): The option is sold at a strike price similar to the current underlying asset price. The premium is highest, but the risk of capping the profit upside is high. This is suitable for investors seeking high cash flow. (e.g., RISE 200 High Dividend Covered Call ATM, KBSTAR 200 High Dividend Covered Call ATM)
- OTM (Out-The-Money): The option is sold at a strike price higher than the current price. While the premium is lower than ATM, it secures Upside Potential, allowing the underlying asset to rise freely up to the strike price. This is desirable for investors seeking a balance between Capital Gain and cash flow. (e.g., KODEX US Nasdaq 100 Daily Covered Call OTM, TIGER 200 Covered Call OTM)
2.3. Target Distribution Rate Strategy (Target): The Importance of Managing NAV Loss Risk
The word 'Target' is attached to many product names. This indicates an Active Management approach where the option selling ratio is adjusted, or the option selling strategy is actively changed based on fund performance, to meet an annual target distribution rate (e.g., 9%~15% target).
However, if the target distribution rate is set too high, the option selling ratio may become excessively large, preventing the capture of any underlying asset gain, or potentially eroding the principal (Net Asset Value, NAV) to pay distributions in a declining market. Therefore, it is essential to consider the volatility of the underlying asset and the maintenance of the NAV, not just the distribution rate.
3. Comparison of Domestic Covered Call ETF Lists by Key Underlying Asset
Currently, domestically listed Covered Call ETFs utilize various underlying assets such as US big tech, dividend stocks, and long-term treasury bonds. The stability of the portfolio and long-term returns are ultimately determined by which underlying asset is invested in.
| Underlying Asset | Main Strategy Type | Representative Product Examples (Partial) | Recent Estimated Annual Distribution Rate |
|---|---|---|---|
| Nasdaq 100 | Daily OTM, Daily Target | KODEX US Nasdaq 100 Daily Covered Call OTM (494300) TIGER US Nasdaq 100 Target Daily Covered Call (473060) |
Approx. 11% ~ 18.03% |
| US Big Tech/AI | Daily Target, Fixed Covered Call | ACE US Big Tech 7+ Daily Target Covered Call (480020) RISE US AI Value Chain Daily Fixed Covered Call (490590) |
Approx. 12.91% ~ 16.35% |
| US Dividend Stocks | Daily Target, Premium Active | TIGER US Dividend Dow Jones Target Daily Covered Call (473070) KODEX US Dividend Premium Active (483300) |
Approx. 9% ~ 17.59% |
| US Long-Term Treasury Bonds | Active(H), Target Covered Call | TIGER US 30-Year Treasury Covered Call Active(H) (476550) SOL US 30-Year Treasury Covered Call (Synthetic) (473330) |
|
| KOSPI 200/High Dividend | Weekly Target, OTM, ATM | KODEX 200 Target Weekly Covered Call (498400) TIGER 200 Covered Call OTM (166400) |
Annual maximum 7% target (KODEX) |
In particular, unlike the past where domestic Covered Call ETFs focused on monthly expiry options, the trend is now to actively utilize Daily and Weekly option strategies, similar to the US market. This is interpreted as an intention to maximize option premiums and minimize the capping of upside potential during volatile market conditions.
4. Two Key Implications for Becoming a Smart Covered Call ETF Investor
4.1. Total Distribution 'Amount' and NAV Maintenance, Not Distribution 'Rate'
Even for products with a high stated distribution rate of 15% or more, the actual total investment return could be negative if the underlying asset's price has fallen by that much. The crucial factor is not the distribution rate itself, but how well the principal (NAV) is maintained while providing cash flow.
Therefore, when selecting an ETF, it is advisable to first evaluate the long-term growth potential of the underlying asset and then check whether the option strategy (OTM, Daily, etc.) has been used to minimize the cap on the profit upside, rather than just looking at the distribution rate ranking.
4.2. The Importance of Strategy Selection Based on Your Investment Goal
Investors must carefully examine the detailed strategy of the product according to their own goals.
- CASE 1: Investor for whom post-retirement cash flow is most important
- Strategy: It is recommended to consider products that sell ATM (At-The-Money) options or Target strategy products aiming for a high distribution rate. However, managing the risk of principal loss is essential.
- CASE 2: Investor also pursuing Capital Gain
- Strategy: It is best to choose products that sell OTM (Out-The-Money) options to allow for upside potential, or products that utilize Daily/Weekly options to shorten the option expiry.
5. Conclusion: Strategic Understanding is Alpha Return
The domestic Exchange Traded Fund (ETF) market has been enriched by the emergence of Covered Call ETFs focusing on monthly dividends. However, if an investor only focuses on the surface of 'high dividend', they may end up suffering significant losses in a declining market or being excluded from a rising market.
It is crucial to remember that the return of a Covered Call ETF depends on the sophistication of the option selling strategy. Clearly understanding the features of evolved 2nd generation Covered Call ETFs, such as Daily/Weekly Option and OTM (Out-The-Money) strategies, and selecting a product that aligns with one's investment goals is the path to long-term investment success.
Key Summary:
Covered Call ETFs are a powerful tool for cash flow, but their ability to track a rising market differs depending on the option expiry (Daily/Weekly) and strike price (OTM) strategies, so they must be selected according to the investment objective.
The contents of this blog are for reference for investment decisions only, and investment decisions must be made under the individual's judgment and responsibility. In no event shall the information in this blog be used as evidence of legal liability for investment outcomes.
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