Covered call writing is for dummies

According to Horizons Funds the Investment Objective of the Horizons S&P/TSX 60 (HXT) is to seek to replicate, to the extent possible, the performance of the S&P/TSX 60 Index (Total Return), net of expenses.

According to Horizons Funds the investment objective of Horizons Enhanced Income Equity ETF (HEX) is to provide unitholders with: (a) exposure to the performance of an equal weighted portfolio of large capitalization Canadian companies; and (b) monthly distributions of dividend and call option income. (and) To mitigate downside risk and generate income, HEX will generally write covered call options on 100% of its portfolio securities. Covered call options provide a partial hedge against declines in the price of the securities on which they are written to the extent of the premiums received.

The annualized price returns of the HEX, since inception March 18, 2011, to date has been a negative 18.38 %. This does not include the annualized income of about 10%.

The competition – namely the iShares S&P/TSX 60 Index Fund which also seeks to provide long-term capital growth by replicating, to the extent possible, the performance of the S&P/TSX 60 Index has generated a negative price return of 7.92% over the same period. This does not include the annualized income of about 2.5%  

My take on covered call writing is that you are forced to sell winners to the call buyer and you are forced to hold losers in order to keep writing those calls. Those management fees however never go away.