Meta Strategies: The Covered Call Covered Call

One of the most fascinating personal investing phenomena of our generation is the ability to apply investing strategies to other strategies. In previous generations, if an individual saw an investment fund they found interesting they had two options:

(1) buy into the fund

(2) do nothing 

The individual investor could not short a fund they thought was bad and go long another fund they thought was good. They could not write options on the performance of the mutual fund[1].

But today they often can. 

Want to go long (or short) the volatility of an ETF powered by AI? You can. Want to create a synthetic future of the inverse Jim Cramer ETF? It’s possible.

What’s even stranger to me is that you can apply an ETF’s strategy to the ETF itself. I call these “meta strategies.”

For example, covered call strategies have grown in popularity in recent years. And for good reason: they might be able to help investors generate impressive returns with relatively lower volatility. As a result, plenty of ETFs have launched helping investors get access to this strategy.

But what if we wanted to run a covered call strategy on a covered call ETF? 

Let’s take a look at XYLD, Global X’s S&P 500 Covered Call ETF. If one would like to go long on XYLD, they buy 1,000 shares. Since this investor may believe there are improvements to their risk-adjusted returns by writing options, they may choose to write (short) 10 call options. This could lead to a very interesting return profile relative to the S&P 500! First, they would likely get some additional risk-adjusted return from the insurance value they provide as part of their long position on XYLD. They would then likely receive some additional risk-adjusted return from the insurance value they provide from their short call position on XYLD.

However, practically speaking, this strategy probably won’t work today. 

Here’s a recent snapshot of options prices for XYLD with an expiration date 29 days in the future:

Source: Interactive Brokers


As you can see, the bid-ask spread is quite wide. Unfortunately, any additional risk-adjusted return earned by writing options will likely be offset by this spread.

While this meta strategy might not work, it illustrates an important point: there exists the potential to design unique strategies on top of other strategies. This was not possible in the days when mutual funds were the game in town for many investors.

As always, please see my disclosures here.


[1]OK, if they were a wealthy individual with a sophisticated family office or wealth manager, they could probably find ways to get this exposure. But for the non-HNW individual, this was not an option.