Why Covered Calls are a SCAM [According to Ben Felix]

Summary

Wealth and Health Podcast with David Jaffee

Episode: Why Covered Calls are a SCAM [According to Ben Felix]
Date: January 19, 2026

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Episode Overview

In this episode, host David Jaffee highlights and expands upon the ideas from Ben Felix’s critical video, "Covered Calls: A Devil’s Bargain". The discussion centers on the widespread myths and realities behind covered call strategies. Both Felix and Jaffee break down why covered calls, despite being marketed as income-generating and low-risk, are in fact structurally designed to underperform their underlying assets. The episode examines the mechanical reasons behind covered calls' poor long-term performance, their tax consequences, and the dangers they pose to long-term investors.

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Key Discussion Points & Insights

1. Overview of Covered Calls and Their Perceived Benefits

• David Jaffee introduces Ben Felix’s argument, noting its accuracy and warning that covered calls almost guarantee long-term underperformance:
  • “If you sell covered calls, then long term you will underperform the market, oftentimes by 5 or 6% every single year.” (B, 00:36)
  • Covered calls trigger tax events taxed at the highest marginal rate.

2. Myths About Income Generation

• Ben Felix bluntly criticizes the notion that covered calls generate true income:
  • “The idea that covered calls generate income is financial bullshit. These strategies are mechanically expected to underperform their underlying equity, and increasingly so at higher targeted levels of distributions.” (C, 01:31)
• Jaffee concurs, stating that marketed ‘income’ is really just synthetic and not sustainable.

3. Risk Profile and Misleading Yields

• Felix explains that covered calls cap upside gains but do little to limit downside:
  • “For long term investors, covered calls increase risk by leaving the downside unprotected while capping the upside.” (C, 01:46)
• The high ‘distribution yields’ of covered call funds are often mistaken for real, sustainable returns:
  • “Selling a high distribution yield as an expected return ignores the fact that yields on covered call strategies are inversely related to their expected returns.” (C, 02:09)
  • “Higher yields mechanically mean lower expected total returns, right? Total returns, to be clear, are what you need to buy groceries.” (C, 02:29)

4. Mechanics: Cap on Upside, Persistent Downside

• Felix warns that received option premiums feel like income but come with significant liabilities:
  • “You receive an option premium... but the fund now has this liability: the potential need to sell the underlying shares below their market value if the price rises above the strike price.” (C, 03:12)
• Jaffee’s recommendation: if you want to create distributions from a position, simply sell some shares—don’t cap your upside unnecessarily.

5. Asymmetrical Risk and Lost Mean Reversion

• Felix explains that covered calls nullify a key benefit of stocks: mean reversion.
  • “Selling calls on your equity positions both lowers the expected returns and eliminates the mean reverting tendency of stocks by capping the upside return while only slightly improving the downside by the amount of the option premium.” (C, 04:47)
• Jaffee adds bluntly: “You can just sell off a few shares. There’s no reason for you to sell a covered call, cap your upside, [and] leave the downside exposure...” (B, 03:37)

6. Empirical Evidence: Covered Calls Consistently Underperform

• Felix presents real-world covered call ETF underperformance:
  • BMO Covered Call Utilities ETF: Distributed ~7.37% yield but underperformed the equivalent ETF by 2.6% annually (over 70% of three-year rolling periods) (C, 05:55–06:55)
  • BMO Covered Call Canadian Banks Fund: Underperformed by 2.71% annually since inception. (C, 07:25)
  • Global X S&P TSX 60 Covered Call ETF: Trailed the index by 3.65% each year. (C, 07:35)
  • Hamilton ETFs Yield Maximizer: Targeted 12% yield, but trailed the S&P 500 by 4.48% over 4.5 years. (B, 08:22)
  • JP Morgan’s Equity Premium Income ETF (JEPI): Despite its popularity after strong performance in 2022, underperforms S&P 500 by nearly 6% annually since inception in May 2020. (C, 08:28)
  • Single Stock Covered Calls: Some funds, like the Tesla ETF, have underperformed the underlying stock by 20 percentage points annually. (C, 09:16)

7. Alternative Approaches—Cash + Stocks Outperform

• Research shows that simply holding a mix of the underlying stock and cash outperforms covered call funds in most periods, with less volatility and a better Sharpe ratio. (C, 06:55)

8. High Costs and Poor Performance

• Management fees and trading costs eat further into returns, with average MER of 0.25% adding insult to injury. (C, 09:16)
• The covered call “income” comes at severe cost as returns consistently lag the underlying.

9. The Big Picture: The "Devil’s Bargain"

• "Taken together, covered calls don’t have anything special to offer. They get you to a place similar to holding a bunch of cash, except that your upside is limited and your downside is unlimited. They’re more likely to be detrimental to most investors’ expected outcomes than to improve them." (C, 09:47)
• Since 2011, the volatility risk premium hasn't offset chronic underperformance; total returns are consistently inferior.

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Notable Quotes & Memorable Moments

• Ben Felix (01:31):
  “The idea that covered calls generate income is financial bullshit…mechanically expected to underperform their underlying equity.”
• David Jaffee (00:36):
  “If you sell covered calls, then long term you will underperform the market, oftentimes by 5 or 6% every single year.”
• Ben Felix (03:12):
  “When you sell the call option, you receive an option premium…but the fund now has this liability…”
• Ben Felix (04:47):
  “Selling calls…both lowers the expected returns and eliminates the mean reverting tendency of stocks by capping the upside…”
• Ben Felix (09:47):
  “Covered calls don’t have anything special to offer. They get you to a place similar to holding a bunch of cash. Except that your upside is limited and your downside is unlimited.”
• David Jaffee (10:11):
  “So yeah, Ben Felix hit a home run and knocked it out of the park… I don’t understand why people would pay money so that they’re virtually guaranteed to underperform the market…”

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Important Timestamps

• [01:31] – Myth-busting covered call income generation (Ben Felix)
• [03:12] – Covered call liabilities and capping upside returns (Ben Felix)
• [04:47] – Consequences for long-term investors and loss of mean reversion (Ben Felix)
• [05:55] – Empirical evidence: Covered call fund historical underperformance (Ben Felix)
• [08:28] – JEPI and single stock covered calls underperform benchmarks (Ben Felix)
• [09:47] – Big picture conclusion: Covered calls offer worse risk/reward than simple buy-and-hold or cash + stocks (Ben Felix)
• [10:11] – David Jaffee summarizes and invites feedback

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Summary Table: Covered Call Performance

| Fund/Strategy | Distribution Yield | Underperformance vs. Underlying | Notable Notes | |------------------------------------------|-------------------|-------------------------------|---------------------------------------| | BMO Covered Call Utilities ETF | 7.37% | 2.6% annually | 70% underperform on rolling 3 yrs | | BMO Covered Call Canadian Banks Fund | 6.13% | 2.71% annually | Since 2011 | | Global X S&P TSX 60 Covered Call ETF | 7.67% | 3.65% annually | Since 2011 | | Hamilton ETFs Yield Maximizer | ~12% | 4.48% annually | 4.5 years, at-the-money calls | | JPMorgan Equity Premium Income ETF (JEPI)| High | 5.92% annually | Since May 2020 | | Single Stock Covered Calls (e.g., Tesla) | 48.59% | 20%+ annually | Since Nov 2022 |

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Conclusion

This episode offers a robust, data-driven deconstruction of the "covered call as income" myth, serving as a warning for retail and long-term investors. Jaffee and Felix demonstrate that covered calls are structurally geared to disappoint, with chronic underperformance, illusory income, and severe opportunity costs on the upside. Investors are better served by understanding the real math behind these strategies—and by leveraging simpler alternatives for both risk reduction and cash generation.

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For more information or to join the conversation, visit BestStockStrategy.com.

Transcript

[A]

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[B]

My name is David Jaffe. Welcome to the wealth and Health Podcast where you'll learn valuable skills and positive habits that will improve your life. This podcast originally aired as a video on my YouTube channel at YouTube.com beststopstrategy. The wealth and Health Podcast is brought to you by beststockstrategy.covered calls a Devil's Bargain by Ben Felix I saw this video previously and I thought that it was amazing, so I wanted to bring it to your attention because everything that Ben says here is accurate. If you sell covered calls, then long term you will underperform the market, oftentimes by 5 or 6% every single year. Additionally, by selling covered calls, you're generating a tax event where you'll be charged the highest marginal tax rate as well. But let's go through this video because Ben Felix explains it very well.

[C]

The idea that covered calls generate income is financial bullshit. These strategies are mechanically expected to underperform their underlying equity, and increasingly so at higher targeted levels of distributions for long term investors, covered calls increase risk by leaving the downside unprotected while capping the upside.

[B]

That's what I've been saying, eliminating the

[C]

mean reverting behavior of stocks, an important feature of stock returns who use high distribution yields to attract investor dollars. The problem for investors is that marketing these yields in the case of covered calls as income or even worse, as expected returns is financial. Selling a high distribution yield as an expected return ignores the fact that yields on covered call strategies are inversely related to their expected returns. Selling a high distribution yield as an expected return ignores the fact that yields

[B]

on covered calls try they're probably inverse related to their expected returns.

[C]

Higher yields mechanically mean lower expected total returns, right? Total returns, to be clear, are what you need to buy groceries. I'm going to walk through why distribution yields are not returns, how covered calls reduce expected returns, and why I think the return profile of covered Calls makes them particularly risky for long term investors. Selling a call option on an equity that you own generates income and creates a liability that empirically more than offsets the income received.

[B]

Is it even income? When someone opens a position by selling a call option, the trade has not ended. The seller has a liability that is not resolved until either the position is liquidated or the option matures and is settled.

[C]

Putting a Cap on Upside Returns when you sell the call option, you receive an option premium.

[B]

Capping your upside feels like income and

[C]

is packaged up and distributed by covered call funds as a cash distribution. But the fund now has this liability, the potential need to sell the underlying shares below their market value if the price rises above the strike price. This liability exists until the position is sold or the option expires. This is something that you could do by simply reducing your exposure to the stock directly, right?

[B]

That's exactly what I tell people. I say, hey, if you want income, quote unquote, and it's synthetic income, it's fake income, you can just sell off a few shares. There's no reason for you to sell a cover call cap your upside, leave the downside exposure while simultaneously leaving open that liability by possessing that short call.

[C]

I'll come back to that with an example later. The problem is that the reduction in exposure to the equity risk premium is also asymmetric. You keep most of the downside while capping your upside at the strike price. This means that through any periods of market volatility, which are of course common in, you're going to have all the downside risk, most of the downside, but you do not participate in a large portion of the upside. Systematically missing out on stock market recoveries, which are common after major downturns, can be very expensive. I want to make sure it's really clear that the point about asymmetry is particularly important for long term equity investors who have historically benefited from a little bit of mean reversion in stocks, making stocks a little bit less risky at long horizons than they would be if returns were completely random. In simple terms, after stocks have performed

[B]

really poorly, they have a tendency to then go back up. We saw this in April 2025. We also saw this in March 2020.

[C]

This is in contrast to bonds, which do not tend to have the same rebound effect after poor performance. Based on this, some research has suggested that the higher expected returns and mean reverting tendencies of stocks make them less risky than bonds for long term investors, including long term investors who need to live off of their investments. But here's the problem selling calls on your equity positions both lowers the expected returns and eliminates the mean reverting tendency of stocks by capping the upside return while only slightly improving the downside by the amount of the option premium. Again, getting most of the downside with a limit on upside is not good. I would argue that it makes covered calls very risky for long term investors who are concerned with funding their inflation adjusted spending. I agree lowers expected returns and transforms the shape of the distribution of returns into something much less favorable for long term investors. One of the biggest problems I see for these funds is that their distribution yields are often much higher than their total expected return with a 14% distribution yield, as if their distributions are perpetually sustainable. It even gives some people the idea that they should borrow money at say 5% to invest in covered call funds with a 14% distribution.

[B]

That would be very cool.

[C]

Combination of high distribution yields, lower expected returns, an uncapped downside I looked for covered call ETFs with minimum 10 year histories. BMO has a few that launched in 2011. The BMO Covered Call Utilities ETF launched October 20, 2011. It currently has a distribution yield of 7.37% compared to 3.43% for an ETF of the underlying equities. In periods where the underlying equities do not perform well, the covered call fund has been able to outperform. But these periods have tended to be brief and in the long run are far more than outweighed by the capped upside. Over the full history since inception, the covered call fund has trailed the underlying by an annualized 2.6 percentage points and it has trailed the underlying in more than 70% of three year rolling periods with a one month step. Increasing the rolling window to four years results in the covered call fund trailing nearly 85% of the time. The underperformance is particularly pronounced when the underlying equities drop dramatically and then recover,

[B]

which is a typical character because it's unable to participate in the upside.

[C]

I also mentioned earlier that reducing equity beta by holding cash can get you to a similar place as a covered call, at least from the perspective of beta. I ran a portfolio of 60% BMO equal weight utilities and 40% cash. You can see they track pretty closely most of the time, except that the covered call fund gives up extreme upside events and eats the whole meal on the downside. Jeff Patak, Managing Director for Morningstar Research Services, recently showed in a sample of 22 single stock covered call ETFs that a combination of cash and the underlying stock outperformed most of the funds, had lower volatility than all of the funds, and had a higher sharp ratio than most of the funds. Another BMO fund with a reasonably long history is the BMO Covered Call Canadian Banks Fund. It launched January 28, 2011. It has a current distribution yield of 6.13% compared to 3.61% for an ETF of the underlying equities, it has underperformed by an annualized 2.71 percentage points since inception. The Global X, s and P TSX 60 covered call ETF launched on March 16, 2011. It currently has a distribution yield of 7.67%. It has trailed the iShares S&P TSX 60 ETF by 3.65% since inception. Hamilton ETF's yield maximizer ETF series targets yield well over 10% percent by selling at the Money Call options. This is very foolish Yield Maximizer ETF as an example, it targets a distribution yield of 12 and has underperformed an S P 500 ETF by an annualized

[B]

4.48 percentage points over almost 4.5 a year. Underperformance.

[C]

This is JP Morgan's Equity Premium Income ETF. It gained a cult like following around 2022 when it outperformed the S P 500 by nearly 15 percentage points. That combined with its prominently marketed high distribution yield has made it extremely popular with retail investors in general and income focused investors in particular. It even has its own subreddit. The problem is that like other covered call strategies, underperformed AN S&P 500 ETF in this case by 5.92 percentage points since inception in May 2020. The most recent and ridiculous development I've seen in the covered call space is single stock. Covered contribution rate at the time of writing is 48.59%, but since inception in November 22nd it has underperformed Tesla by more than 20 percentage points annualized.

[B]

Wow.

[C]

While funds holding the same underlying equities have an average management expense ratio of 0.25% and an average trading expense ratio of 0%, you are paying a significant price has all of the downsides of covered calls. Taken together, covered calls don't have anything special to offer. They get you to a place similar to holding a bunch of cash. Accept that your upside is limited and your downside is unlimited. They're more likely to be detrimental to most investors expected outcomes than to improve them. Their high yields come at the expense of lower expected returns and historically lower realized returns. The Volatility risk premium, which could theoretically help covered calls recoup their lower expected returns, has not been anywhere near sufficient to offset the reduction in expected returns since around 2011. All of these downsides show up very clearly in the terrible long term performance of covered call strategies when measured properly by their total returns.

[B]

So yeah, Ben Felix hit a home run and knocked it out of the park. Let me know your thoughts below and leave a comment. I don't understand why people would pay money so that they're virtually guaranteed to underperform the market, but if you disagree, let me know. Leave a comment below. Visit Best Stock Strategy.com and submit your email address to receive valuable free training. Please give this podcast a positive reading and review. If you have any questions, visit beststock strategy.com and send me a message.

[D]

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