0DTE·Mismatch... Covered Call ETF, Diversification of Management Strategies

Covered call exchange-traded funds (ETFs) are establishing themselves as the dominant trend in the ETF market. This is due to the surge in demand for monthly dividends, leading to a wave of covered call products emphasizing high dividends being listed. As the market has grown, the product structures of covered call ETFs have also diversified. In addition to products utilizing monthly and weekly options, products using daily options (0DTE) were introduced domestically for the first time in April.

The ACE US 500 Daily Target Covered Call (Synthetic) ETF, ACE US Semiconductor Daily Target Covered Call (Synthetic) ETF, and ACE US Big Tech 7+ Daily Target Covered Call (Synthetic) ETF, launched by Korea Investment Trust Management, are the main examples.

0DTE options have shorter maturities and thus lower premiums compared to monthly or weekly options, but since they are traded daily, it is possible to collect premiums about 20 times per month. As a result, the total premium amount over the same period can be higher than that of monthly or weekly options.

Of course, 0DTE is not a cure-all. Since 0DTE option trading became widespread in 2022, it is still uncertain what risks will be borne in unforeseen black swan events. In the event of rapid market changes, the premiums received may be lower than expected. Therefore, Korea Investment Trust Management designed the ETFs synthetically. They receive performance through local investment banks with extensive experience in the US options market, enhancing the stability of management and performance.

Operational strategies to overcome the downside of covered calls, namely the 'upside limitation,' have also emerged. The JPMorgan Equity Premium Income (JEPI), the world's largest covered call ETF and regarded as the perfected form of the covered call strategy, is a representative example. JEPI uses out-of-the-money (OTM) options while mismatching the underlying assets of stocks and options.

Korea Investment Trust Management also utilizes OTM options together with 0DTE options. The shorter the maturity, the more important the timing of determining the option strike price becomes. Unlike at-the-money (ATM) options, OTM options allow the strike price to be decided one day before expiration. This enables securing a certain portion of the underlying index's gains by reflecting market changes.

The possibility of selling in-the-money (ITM) options is also significantly lower than ATM options, which determine the strike price two days before expiration. The 'mismatching strategy' is also applied. The ACE US Semiconductor Daily Target Covered Call (Synthetic) ETF and ACE US Big Tech 7+ Daily Target Covered Call (Synthetic) ETF launched by Korea Investment Trust Management are representative examples. Both ETFs use the 'Invesco QQQ Trust Series 1 (QQQ ETF)' as the option underlying asset. However, the underlying indices are designed as the US Semiconductor Index and the Big Tech (large information technology companies) Index, respectively.

All types of covered call ETFs incur losses when the decline in the underlying index exceeds the option premium. Therefore, a stock portfolio with higher growth potential than the option assets was selected.

According to the Koscom ETF Check on the 23rd, the ACE US 500 Daily Target Covered Call ETF recorded the highest monthly distribution rate among domestic ETFs at 1.27%. The monthly distribution rates of the ACE US Big Tech 7+ Daily Target Covered Call ETF and ACE US Semiconductor Daily Target Covered Call ETF were each 1.26%.

The ACE US Big Tech 7+ Daily Target Covered Call (Synthetic) posted a 6-month total return, including dividend income, of 23.74%, alleviating concerns about profit limitations due to the rise in the underlying assets of covered call products. The ACE US Semiconductor Daily Target Covered Call ETF and ACE US 500 Daily Target Covered Call ETF recorded 14.86% and 14.50%, respectively.

Nam Yong-su, head of ETF management at Korea Investment Trust Management, said, "Even products using similar underlying assets and options can have different performances depending on option maturity, strike price strategies, and so on, so investors should carefully examine the investment strategies of each product." He added, "As with other financial investment products, covered call ETFs are exposed to investment losses when the underlying index declines, so investors should be well aware of the investment risks before investing."