John Heinzl has written an article with the captioned title that follows up his earlier piece titled Ups and downs of doing the splits.
“Jim from Victoria” wrote in and said (among other entertaining things):
Also you failed to mention that the shortfall in dividend income for the capital shares is made up from writing covered calls, one of the most secure and safest types of income investing one can do IF you know what you doing.
I was asked for comment:
Regarding your point about selling options to generate income, I asked split-share expert James Hymas of Hymas Investment Management to comment generally on the strategy of writing covered calls to fund dividends on the capital shares. (When an investor writes a covered call, he earns cash in exchange for granting the right to another investor to buy his shares at a specific price on a certain date.)
Here’s what Mr. Hymas had to say: “There does not appear to be any support for the claim that the strategy is doing anything useful at all for the split share corporations. None of them break out their books in sufficient detail for an assessment to be made; none of them or their subadvisers provide any actual performance data to support such a claim.
“The only thing that can be said for [selling covered calls] is that it will produce income, at the expense of potential capital gains. There is a tradeoff there.”
With all due respect, I think “Jim from Victoria” is quite incorrect …I’ve traded options on commodities professionally for years, and supported various option based customer businesses…over the long run, all covered call strategies do is take away your upside, while costing much more than selling would…there’s no free lunch, unless of course you are the option market makers whom the split share managers engage…as for “if you know what you’re doing”, it’s market timing plain and simple and I highly doubt that the split fund managers have any special predictive abilities…selling options for income usually turns out like this…make small money several times, lose huge money once, pay fees through a wide bid/ask spread repeatedly…upside calls in Canadian equities are very well offered…I can further imagine how badly skewed the bid/ask gets when the bank gets a call from one of these split funds requesting an option market
I agree. There’s some pre-crisis evidence supporting the hypothesis that a call-write strategy dampens volatility, but that’s about it.
There’s certainly nothing, as far as I know, publishe by the split-share corporations or their subadvisors to support the idea that their implementation of the strategy is anything other than a marketting gimmick.