Covered Call vs. Long Stock Showdown $RYLD $IWM

Covered Call Strategy vs. Long Market - Retirement Impact!

A few weeks ago I was talking to my brother about a covered call strategy versus just being long the S&P 500. He had explained to me that a person he had been following was touting the benefits of just staying long the S&P 500 using an ETF similar to $SPY.

This conversation intrigued me because generally I am an options trader and believe that a covered call strategy is much more beneficial than just being a long stock.  I found a website, portfolio labs.com, which allows you to look at and back test different stocks.  I compared $XYLD to SPY and found that in the long term $SPY was a better performer than $XYLD.  I then went to the $RYLD and $IWM and found a little different picture.  Based on the two different stocks with similar covered call ETFs versus long stock ETFs.  I believe we were both right.

In the more volatile stock.  The $IWM having a covered call strategy performs the same and perhaps even a little better than the long stock.  The reason I say this is although the $IWM and is ever so slightly higher you collect an income which is higher using the $RYLD.  Which actually got me thinking, yet again.  If going long the S&P 500 in a lazy portfolio suitable for people of all age groups?  This is where I think the covered call strategy might be better.

If you’re younger then obviously the S&P 500 would be the better investment, however, when you’re older and can’t take as much risk to the downside, the covered call strategy would be best.  In your retirement years, you would want income monthly, which the covered call strategy provides.  Based on this concept as you get older you may want to switch a portion of your portfolio from a long $SPY strategy and include a covered call strategy of some sort.

There’s another caveat.  If you had to take money out of your lazy long $SPY strategy, you would reduce the principal and thus the returns.  To me this would amplify any down moves.  Also, the comparison just goes back to where the covered call ETF’s originated in the 2010s, so the big drop in 2008 is NOT factored in  The “covid” drop would have decimated someone closer to retirement.  However, if you are retired, you would’ve still collected a dividend the covered call strategy.

My plan is simply to live off the dividends of the covered call strategy versus dipping into the principal.  I believe this is an easier way to budget in a more stable way to live off my investments.  What do you think?

To see the source post on PortfolioLab.com: RYLD vs IWM