I prefer taking the subway over buses when I have an appointment
It's less likely to make me motion sick while reading,
and I enjoy the chance to observe various people
Recently, I overheard two young people discussing stocks on the subway,
and their conversation caught my interest
They were talking about the hot topic of the moment: covered call ETFs.
A : "Hey, have you heard about covered call ETFs? They're insane!"
B : "What’s that?"
A : "Dude, they pay a ton every month."
B : "That sounds like a scam."
A : "No, seriously, the money just keeps coming in every month!"
B : "Wow, that sounds crazy. But is it legit?"
A : "Not sure, but I’m telling you, it pays every month!"
There are countless types of ETFs out there, but today,
I want to focus on what's being hyped as a money-printing ETF—the covered call ETF
Instead of diving deep into how it works (you can easily find that on Wikipedia),
let's cut to the chase and see if it's actually profitable
Let’s take a look at the most famous one, the Tesla Covered Call ETF (TSLY), and do some quick math
As of September 3, 2024, the price per share is $13.74
But what’s important here is the monthly dividend payout
If we look at the latest dividend declaration, we see that last month, it paid out $0.96 per share
Now, let's do some simple math
If you bought a share for $13.74 and received $0.96 as a dividend, what's the yield?
The calculation is straightforward: $0.96 ÷ $13.74 × 100 = 6.98%
But here’s the kicker: this is a monthly yield
If you annualize it, the return is: 6.98% × 12 = 83.76% annually (lol)
At this point, you might be thinking, “Wow, that’s incredible! I’m all in!”
But hold on a second—let me calm you down before you go all in on this
Take a look at TSLY’s price chart
If you had bought it at the start of 2024, the price was around $25 per share
Now it’s dropped to $14, meaning your original investment has taken a 44% hit
Let’s run a quick simulation then
If you had invested $100 at the start of the year, you would have bought four shares at $25 each
With a monthly dividend payout of $0.96 per share, that would give you: 4 × $0.96 = $3.84 per month
If you held it for eight months, you would have earned a total of: $3.84 × 8 = $30.72 in dividends
But remember, the share price dropped, so your initial $100 is now worth: $14 × 4 = $56
So, your total assets would be: $56 (remaining principal) + $30.72 (dividends) = $86.72
That means, despite investing in a product with an 84% annual dividend yield,
you’ve actually lost 14% of your original $100 investment over eight months
While the high dividend yield is tempting, the risk of capital loss is real,
and that’s something you’ll need to consider carefully
So, People around me are talking about making a fortune with covered call ETFs,
It could be half right and half wrong :) haha
Wishing you all success and good health!