Understanding Covered Call ETF Option Strategies - ATM, OTM, Target, and Fixed Explained

🤔 Why Are Covered Call ETFs So Complex?

"Why do returns differ so much between NASDAQ100 covered call ETFs?"

Many investors ask this question. The answer lies in option strategies. This guide explains covered call ETF option strategies in simple terms.

📚 Basic Concept: Option Sell Ratio and Upside Participation

The core principle of covered call ETFs is simple:

Higher option sell ratio = Lower upside participation Lower option sell ratio = Higher upside participation

Selling more options increases premium (dividend source), but you give up more price appreciation.

🎯 ATM vs OTM Options

ATM (At The Money) Options

• Definition: Strike price equals current stock price
• Feature: Higher premium
• Upside participation: Limited by option sell ratio

OTM (Out of The Money) Options

• Definition: Strike price higher than current stock price
• Example: 1% OTM = strike 1% above current price
• Feature: 100% upside participation up to strike price
• Downside: Gains beyond strike are forfeited

📊 Three Option Strategies Analyzed

1️⃣ Target Strategy

Representative ETF: Tiger US NASDAQ100 Target Daily Covered Call

How it works:

• Sets 15% annual premium as "target"
• Auto-adjusts option sell ratio based on volatility
• High volatility: Lower sell ratio (less needed for 15%)
• Low volatility: Higher sell ratio (more needed for 15%)

Average option sell ratio: 10-15% Average upside participation: 85-90%

2️⃣ OTM Strategy

Representative ETF: Kodex US NASDAQ100 Daily Covered Call OTM

How it works:

• Sells 1% OTM daily options
• Daily gain under 1%: 100% upside participation
• Daily gain over 1%: Maximum 1% only

Key feature:

• Upside participation isn't "0% or 100%"
• There's a 1% "ceiling"
• Favorable in gradual uptrends

3️⃣ Fixed Strategy

Representative ETF: Rise US Tech100 Daily Fixed Covered Call

How it works:

• Option sell ratio fixed at 10%
• Consistent strategy regardless of market conditions
• ~90% upside participation, predictable

Premium characteristics:

• High volatility: High premium → High distributions
• Low volatility: Low premium → Low distributions

💡 Why Daily Options?

All three ETFs use daily options. Here's why:

Shorter expiration = Higher premium

• Much higher premium than monthly options
• 10% selling can achieve 15%+ annual yield
• US-listed daily option ETFs distribute 20%+

📈 Favorable Market Conditions by Strategy

Strategy	Favorable	Unfavorable
Target	Volatile rallies	Sideways markets
OTM	0-1% gradual gains	Repeated 1%+ surges
Fixed	Rallies (especially high vol)	Gradual uptrends

⚠️ Common Misconceptions Corrected

"10% sell ratio but 15% dividends? Is this a scam?"

No. It's because of daily ATM options.

• Extremely short 1-day expiration
• ATM options have highest premiums
• Combined, 10% selling generates substantial premium

"Isn't OTM always better?"

No. Look at April 2025:

• NASDAQ surged 12% in one day
• OTM ETF: Maximum 1% gain
• ATM ETF: ~10% gain

Advantages completely flip depending on market conditions.

📝 Conclusion

When choosing covered call ETFs:

1. Verify the option strategy
2. Assess fit with current market conditions
3. Diversify to hedge strategy-specific risks

No single strategy wins in all situations. Understand each strategy's characteristics and apply accordingly. 🙏