Covered Calls: The 'Devil's Bargain' Thesis

In this episode, Ben and Dan take a deep dive into covered call strategies—popular ETFs often marketed on their eye-catching distribution yields. While these products promise steady “income,” the reality is more complicated. Drawing on recent research from the Journal of Alternative Investments (“A Devil’s Bargain: When Generating Income Undermines Investment Returns”), Ben and Dan unpack why covered calls often reduce expected returns, cap the upside of equities, and leave investors fully exposed to the downside. They explain how covered calls work, why yields are misleadingly presented as “income,” and why long-term investors may find themselves worse off over time compared to simply holding equities or combining equities with cash. The conversation covers live fund performance, behavioral biases that drive demand for yield, and the rise of extreme products like single-stock covered call ETFs with 40%+ “yields.” While covered calls may offer psychological appeal for investors who crave distributions, the evidence shows they often deliver lower total returns, higher costs, and asymmetric risk. If it sounds too good to be true, it probably is—and nowhere is that clearer than in the world of covered call ETFs.

Key Points From This Episode:

(0:01:09) Why “14% yield” claims on covered call funds are misleading.

(0:02:35) Revisiting covered calls: “A Devil’s Bargain” and new research insights.

(0:05:24) The deep-seated investor preference for income—and how fund companies exploit it.

(0:10:10) What a call option is and how it caps upside while leaving downside intact.

(0:14:53) Why selling calls lowers expected returns and distorts stock return patterns.

(0:20:25) The volatility risk premium: theory versus retail investor reality.

(0:22:17) How crowded trades since 2011 erased much of the benefit of covered calls.

(0:24:56) Why stocks’ mean reversion makes covered calls especially damaging for long-term investors.

(0:28:11) The illusion of “income”: distributions versus true total returns.

(0:34:41) Evidence from live funds: BMO utilities and banks covered call ETFs.

(0:40:53) Underperformance across rolling periods—covered calls vs. their underlying.

(0:46:17) JEPI and cult-like covered call products: big marketing, poor long-term results.

(0:47:36) The rise of single-stock covered call ETFs—and why they’re worse.

(0:53:45) Higher costs: MERs and trading expenses add to the drag.

(0:57:25) Why marketing yields as “income” is financial BS.

(0:58:47) Final verdict: covered calls are more likely to harm than help investors’ outcomes.

Links From Today’s Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/ 

Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/

Rational Reminder on X — https://x.com/RationalRemindRational Reminder on TikTok — www.tiktok.com/@rationalreminder

Rational Reminder on YouTube — https://www.youtube.com/channel/

Rational Reminder Email — info@rationalreminder.caBenjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Dan Bortolotti — https://pwlcapital.com/our-team/

Dan Bortolotti on LinkedIn — https://ca.linkedin.com/in/dan-bortolotti-8a482310

Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com)