Summary YieldMax COIN Option Income Strategy ETF exemplifies the risks of covered call ETFs when the underlying stock, like Coinbase, declines sharply. Covered call ETFs are engineered to capture 80-85% of upside or downside but cannot shield investors from significant price drops in the underlying asset. Reverse splits in CONY and similar ETFs were likely triggered by 90%+ value losses, aiming to prevent shares from approaching zero and maintain investor engagement. Total return erosion and capital distribution risks are inherent in high-yield covered call ETFs, especially during severe drawdowns in volatile underlying stocks. Yes, it's been a roller coaster for Coinbase ( COIN ) shareholders. But they probably expected it. Crypto investing has its ups and downs. However, this article is about the collateral damage from investing in a covered call ETF and having the misfortune of seeing the underlying stock fall down... hard, in the case of COIN. And perhaps harder when it comes to the YieldMax COIN Option Income Strategy ETF ( CONY ), one of several covered call ETFs I listed in a table in my very recent article , which was a broader-based thesis on the nature of these vehicles. Frankly, I had put the covered call thing out of my mind for a while. I had not planned to write about it for a while, other than here and there. But since I'm old enough to have invested in ETFs since there were ETFs (1993), and before that toiled in the world of covered call writing mutual funds, when I see a chance to share aspects of my experience that might help a wider audience here, I shift priorities. Just look at that yield, eh? Who wouldn't jump at that? But yield is a statistic, NOT a total return. No matter how fast an investment pays you back with your own money, it's still your own money, not your profit. That said, when COIN stock was flying, it was fine. But it could not continue that way, no matter how many fans of covered call ETFs insisted back then that it could. SA This market cycle, as it relates to covered call ETFs, has something in common with past cycles... EVERYTHING. Just with many more investors involved. And, with many at prime ages, something like this could impact their portfolios a lot more than when they were in their peak earnings years. That's why I keep writing about this topic. Because I see from the reaction to previous articles on this broad subject that a lot of readers want to talk about it. In particular, the first few comments on that previous article made me realize something: Playtime is over for covered call ETF investors By no means does that imply there's no upside in them. Just that the stock market just reminded us how vulnerable they are. If the underlying stock tanks, the covered call ETF tanks with it. It is a law of nature. It's how most of them are built. Oh, there are some in this peer group that add other strategies to the base approach of owning (synthetically or otherwise) stocks or index investments, then methodically writing covered calls to bring in income. That all works nicely. But it doesn't stop most of the price risk from happening. Data by YCharts I was asked why CONY did a reverse split, as was the case with 14 other ETFs in the YieldMax family back in November. Why? Because that's what they need to do when the price drops so much. Like this. Data by YCharts If this were a piece of classic artwork, it might be called "an investor contemplates what went so wrong." COIN in the lower half of the graphic, and we see its price and total return are both around 40%. With a minus sign preceding it. The top part of the chart is what happened to CONY. Did CONY do anything wrong? NO. It is doing what it is supposed to do. It's all there, in the blue and white. YieldMax ETFs And when the math works against it, and the underlying stock's price erodes, the only way to save the ETF from disaster is to change the strategy. And for a registered security like an ETF, that's not going to happen unless they have already arranged for it to be more flexible. YCharts But obviously, most of them don't have that flexibility built in. To protect with puts (though that would be expensive) and to hold a lot of cash (it is already backed by T-bills as shown above, but that doesn't protect from stock losses). The other thing I've seen in recent comments is that there are other covered call ETFs that somehow escape from this type of "jail" situation. The ones that do are built that way or are actively managed. Here are some that don't and others that do, to fill in that gap. Using a similar set of data ranges as I did previously, I wanted to see how a set of covered call ETFs outside of YieldMax did. Conclusions below the table. YCharts The stress test was last February through April. That was followed by the big rally through year-end and then this year's skittish dance near new highs for the S&P 500. JEPI did a nice job, relatively speaking. But that's because its active stock selection process allows it to separate from the S&P 500's top-heavy mix of Magnificent-7 names. As a result, JEPI earned only 50% of SPY's ups during last year's rally. We see that most of these, like the rest of the group using the S&P 500 as its base to write calls on, fared similarly. Amplify CWP Enhanced Dividend Income ETF ( DIVO ) and NEOS S&P 500 High Income ETF ( SPYI ) are 2 that get brought up regularly in the comments section. I went back to their common inception date in 2022 to allow for more of a testing ground. Data by YCharts Both funds landed between the S&P 500 ( SPY ) and the equal-weighted S&P 500 ( RSP ). That's very normal in my book, given that the former has done much better than average, while the latter has lagged by a historic margin. But is there some magic at play with DIVO and SPYI? Not in my eyes. DIVO has a good idea in that it invests in a concentrated group of 20-25 stocks, all of which pay dividends. And it writes covered calls on those. There will be markets where this ETF will shine, but it still can't escape equity downside risk. SPYI is the one that, before I first analyzed it a while back, I thought to myself, "based on what so many people are saying about it, maybe THIS is the one that stands out in the group." Nope. It has the same type of downside risk as many others. Its up capture is solid. But that's also a function of a wildly fluctuating market at times. But this holdings snapshot contains all recent positions in SPYI that are not simply stocks (it owns 500 of them, the S&P 500). NEOS Funds I do not see anything other than a couple of "standard issue" covered call positions. That explains this ETF's performance versus the underlying index. In other words, no magic potion here either. A simple formula for covered call ETF analysis 1. Look at what the underlying assets are. 2. See if the "overlay" strategy is anything other than the usual approaches. 3. If not, assume it will get 80-90% of the upside (or less) and 80-90% or so of the downside. The little option ETF that has a nice lesson for us Ironically, the one I most identify with as a risk manager from that list is the smallest in assets by far. And far from the best performer. It's the Global X S&P 500 Collar 95-100 ETF ( XCLR ). It has only $3mm in assets, despite being more than 4 years into its history. That's less than the portfolio size of a decent chunk of the Seeking Alpha audience! But as is clear by now, I'm not about popularity. I'm about pointing out ETF structure to help investors understand why performance happens before it happens. What I do like about XLCR is that it actually has a pre-built risk control system. It is not the best, but it does attempt to put a "floor" on returns; that's something I do in all of my work, whether through options or otherwise. In the case of XCLR, the put options knock out much of the covered call income, but the total return holds up better. Global X It does so in the way I've written about a lot here. XCLR is simply the S&P 500 stocks, with an OPTION COLLAR around it. Covered calls AND protective puts. And while I don't endorse the fund itself, the collar method is one of my favorite approaches to risk management. Because it defines the worst-case scenario. And Global X tracks it daily on its site: Global X That doesn't avoid the risk of losing 5%, resetting the collar and losing another 5%, and so on. But my point in all of this is simple: Plan how you want to play defense before the market forces you to hurry up and think about it. Proactive balancing of offense and defense is my forever approach. And most covered call ETFs, be it CONY or the others, are only as good as their underlying equity holdings. Just realizing that is a big advantage for those who want to minimize maximum regret.
