Eyes on Covered Call ETF Amid 'Bokseupi' Market Movement

Advantageous Loss Protection in Stock Market Box Range
Distinguished as ATM and OTM by Call Option Method
ATM Advantageous in Mild Decline and Sideways Market
OTM Advantageous in Mild Rise and Sideways Market
'KBSTAR 200 Gobaedang Covered Call ATM ETF' Shows Strong Returns

[Asia Economy Reporter Hwang Yoon-joo] As the domestic stock market remains in a sideways trend due to the rapid pace of interest rate hikes and the Russia-Ukraine war, covered call ETFs (Exchange-Traded Funds) are gaining attention. In particular, in a box range where the index declines moderately, covered call ETFs using the ‘ATM (At-The-Money)’ call option method have proven effective in loss prevention.

According to the Korea Exchange on the 18th, among the covered call ETFs listed domestically, the ‘KBSTAR 200 High Dividend Covered Call ATM ETF’ recorded recent 1-month and 3-month returns of 5.29% and 6.63%, respectively. This contrasts with the KOSPI, which fell by -0.59% and -9.9% during the same periods.

Especially since the beginning of the year (3-month returns), compared to ETFs tracking the KOSPI, the loss prevention of covered call ETFs using ATM call options stands out. For example, the ‘TIGER200 Covered Call ATM ETF’ showed returns of 2.66% (1 month) and -3.58% (3 months) during the same period.

Kim Hae-in, a researcher at Daishin Securities, said, "Last week, the stock market generally weakened due to the possibility of a big step rate hike by the Federal Reserve and the release of high inflation indicators." He added, "Since there is both good U.S. employment data and expectations that inflation has peaked, with turnaround forecasts emerging, using covered call ETFs can be an alternative in the short term when expecting a sideways box range market."

Covered call refers to a strategy of buying the underlying stock (or index) while simultaneously selling call options on the same stock (or index). Depending on the call option method, there are two types: ATM and OTM (Out-Of-The-Money). To conclude, in a sideways market like the recent KOSPI market with a gentle downward trend, the ‘ATM’ method is advantageous for loss prevention. For example, an ‘ATM’ call option covered call ETF buys stocks corresponding to the KOSPI 200 while selling call options at the current price with a premium. This is beneficial when the KOSPI 200 index is likely to remain sideways at the option expiration date and when you want to defend against index declines.

The ‘5% OTM’ call option buys stocks corresponding to the KOSPI 200 and sells call options with a premium at a price 5% higher than the current price at the option expiration date. If the KOSPI 200 index at expiration is the same or rises less than 5%, you can earn the premium as profit. This is advantageous when you expect a high possibility of KOSPI 200 index rising in the future while wanting to partially defend against declines.

[Image source=Yonhap News]

Another strength is the relatively high distribution rate. Researcher Kim explained, "The reason for the high distribution rate is that, in addition to dividends from the underlying stocks, the option premiums generated monthly from selling call options become the source of distributions." In Korea, KBSTAR products had an annual distribution rate of 2.8%, and TIGER announced that from April this year, the annual distribution rate will be at least 5% for ATM ETFs and at least 3% for OTM ETFs.

When the domestic stock market is unreliable, it is worth paying attention to Samsung Asset Management’s ‘KODEX U.S. S&P High Dividend Covered Call (Synthetic H) ETF.’ Among covered call ETFs listed domestically, it has the best returns. This is because it invests in energy companies (Caterpillar, ExxonMobil, Chevron, etc.) with the highest dividend yields among S&P 500 companies and global consumer goods companies with high dividends (Johnson & Johnson, Coca-Cola, 3M, McDonald’s, etc.).

In cases of high volatility and continued sideways markets, covered call ETFs, which allow individual investors to trade easily whenever desired and have relatively lower fees than public funds, can be an investment alternative.

However, there are also drawbacks to ‘covered call ETF’ products. If the KOSPI 200 stocks or index rise more than 5% at the option expiration date, it is difficult to fully enjoy the increase. In a sharp bull market, most domestic covered call ETFs have an AUM (Assets Under Management) of only around 6 billion KRW and trading volumes are lower compared to general ETFs.

This content was produced with the assistance of AI translation services.