COVERED CALL ETFs EXPLAINED|GREAT CHOICE FOR PASSIVE INCOME INVESTORS |INCREASE YOUR DIVIDEND INCOME

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Covered Call strategy uses OPTIONS trading. Trading options is simply another way investors can make money using stocks. An agreement that gives the buyer the right, but not the obligation, to buy a stock at the agreed upon price within a specified time frame. The buyer pays a fee to the seller for that right.

Confused?. Let’s say you want to buy a house that's for sale. You and the seller agree on a price. But you are still a little unsure and want to shop around some more. Also, the seller is in no rush to sell the house; he's more than happy to live in it for the time being, so a small delay works out for both parties.

The potential buyer can buy an “option” from the owner of the house in order to reserve the house for 30 days with the sale price you both agreed on. The seller of the house will get a small “premium”, which is a small fee from the potential buyer in exchange for peace of mind, since it gives the buyer the option, but not the obligation to buy the house in 30 days.

If the value of the house stays the same or goes down within 30 days. If the buyer is no longer interested in purchasing the house, he can walk away. In this scenario, the seller of the house gets to keep that small fee from the uninterested buyer.

if the value of the house goes up a bit within the 30 days, the buyer will probably decide to buy the house because it's worth more than the sale price you both agreed on and locked in 30 days ago. If this happens, the buyer will purchase the house from the seller with the price they agreed on 30 days ago.

Homeowner = ETF Owner (Which is the us, the Investor)
House = A stock in the ETF
30 day Reservation Sold to the buyer = Call Option
Agreed upon price = Strike Price
Fee the buyer pays to the homeowner = Option Premium

The reason why it's called “Covered Call'' is because as the owner of the stock you are “covered” in case the potential buyer decides to exercise the option he bought from you and actually buys the stock from you. As the seller, you're covered, because you already own the stock in question.Still confused? Let’s analyze the possible outcomes

Outcome# 1: Stock price goes down after 30 days:
Good for the Seller (or us the investor) as the option expires worthless and the seller keeps the premium

Although you're not too happy the stock price goes down, you just softened the blow because at least you made a commission in the form of that Option Premium, plus as a passive income investor, you're glad to just hold on to the stock for the long term anyways.

Outcome# 2: Stock price stays the same after 30 days:
Good for the Seller as the option expires worthless and the seller keeps the premium. This is simply because the stock price is the same, so the buyer won’t need to buy the stock from you, he can just
buy it himself at the same price.

Outcome# 3: Stock price goes up (above the strike price) after 30 days:
In this case: we are obliged to sell the stock to the buyer at the strike price but make a small profit in doing so. However, this can limit the potential for more upside since the stock can continue to rise. You can miss out on that gain since you already sold the shares to the buyer.

Why Choose ETF with Covered Call Strategy?

This strategy works well for Blue Chip stocks as they are stable
This strategy works well to increase dividend passive income
This strategy works well during stock market downturns.

In the case of stock market downturn this strategy works well because, there's no way the buyer of the option will exercise the option, so you get to keep the premium. This softens the blow when stock prices fall dramatically, because at least you're making money from those premiums.

Links:
BMO Canadian Dividend ETF:
https://www.bmo.com/gam/ca/advisor/products/etfs?locale=en-CA#fundUrl=%2FfundProfile%2FZDV
VS
.BMO Canadian Covered Call Dividend ETF:
https://www.bmo.com/gam/ca/advisor/products/etfs?fundUrl=/fundProfile/ZWC!hash!overview#fundUrl=%2FfundProfile%2FZWC%23overview
BMO 6 Canadina Banks ETF:
https://www.bmo.com/gam/ca/advisor/products/etfs?fundUrl=/fundProfile/ZEB!hash!holdings#fundUrl=%2FfundProfile%2FZEB%23holdings
VS.
BMO 6 Canadina Banks Covered Call ETF:
https://www.bmo.com/gam/ca/advisor/products/etfs?locale=en-CA#fundUrl=%2FfundProfile%2FZWB

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