Understanding Covered Call ETF Option Strategies - ATM, OTM, Target, and Fixed Explained
🤔 Why Are Covered Call ETFs So Complex?
"Why do returns differ so much between NASDAQ100 covered call ETFs?"
Many investors ask this question. The answer lies in option strategies. This guide explains covered call ETF option strategies in simple terms.
📚 Basic Concept: Option Sell Ratio and Upside Participation
The core principle of covered call ETFs is simple:
Higher option sell ratio = Lower upside participation Lower option sell ratio = Higher upside participation
Selling more options increases premium (dividend source), but you give up more price appreciation.
🎯 ATM vs OTM Options
ATM (At The Money) Options
- Definition: Strike price equals current stock price
- Feature: Higher premium
- Upside participation: Limited by option sell ratio
OTM (Out of The Money) Options
- Definition: Strike price higher than current stock price
- Example: 1% OTM = strike 1% above current price
- Feature: 100% upside participation up to strike price
- Downside: Gains beyond strike are forfeited
📊 Three Option Strategies Analyzed
1️⃣ Target Strategy
Representative ETF: Tiger US NASDAQ100 Target Daily Covered Call
How it works:
- Sets 15% annual premium as "target"
- Auto-adjusts option sell ratio based on volatility
- High volatility: Lower sell ratio (less needed for 15%)
- Low volatility: Higher sell ratio (more needed for 15%)
Average option sell ratio: 10-15% Average upside participation: 85-90%
2️⃣ OTM Strategy
Representative ETF: Kodex US NASDAQ100 Daily Covered Call OTM
How it works:
- Sells 1% OTM daily options
- Daily gain under 1%: 100% upside participation
- Daily gain over 1%: Maximum 1% only
Key feature:
- Upside participation isn't "0% or 100%"
- There's a 1% "ceiling"
- Favorable in gradual uptrends
3️⃣ Fixed Strategy
Representative ETF: Rise US Tech100 Daily Fixed Covered Call
How it works:
- Option sell ratio fixed at 10%
- Consistent strategy regardless of market conditions
- ~90% upside participation, predictable
Premium characteristics:
- High volatility: High premium → High distributions
- Low volatility: Low premium → Low distributions
💡 Why Daily Options?
All three ETFs use daily options. Here's why:
Shorter expiration = Higher premium
- Much higher premium than monthly options
- 10% selling can achieve 15%+ annual yield
- US-listed daily option ETFs distribute 20%+
📈 Favorable Market Conditions by Strategy
| Strategy | Favorable | Unfavorable |
|---|---|---|
| Target | Volatile rallies | Sideways markets |
| OTM | 0-1% gradual gains | Repeated 1%+ surges |
| Fixed | Rallies (especially high vol) | Gradual uptrends |
⚠️ Common Misconceptions Corrected
"10% sell ratio but 15% dividends? Is this a scam?"
No. It's because of daily ATM options.
- Extremely short 1-day expiration
- ATM options have highest premiums
- Combined, 10% selling generates substantial premium
"Isn't OTM always better?"
No. Look at April 2025:
- NASDAQ surged 12% in one day
- OTM ETF: Maximum 1% gain
- ATM ETF: ~10% gain
Advantages completely flip depending on market conditions.
📝 Conclusion
When choosing covered call ETFs:
- Verify the option strategy
- Assess fit with current market conditions
- Diversify to hedge strategy-specific risks
No single strategy wins in all situations. Understand each strategy's characteristics and apply accordingly. 🙏