1. A "Devil's Bargain": When Generating Income Undermines Investment Returns.
- Author
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Israelov, Roni and Ndong, David Nze
- Subjects
RATE of return ,INVESTORS ,ACCOUNTING ,NEGOTIATION ,STRATEGIC planning - Abstract
Many investors are motivated by passive income. Dividend income-seeking strategies have a long history. More recently, interest in derivative income strategies—such as covered calls and put underwriting—continues to develop. Do high derivative income-covered calls tend to deliver higher total returns? No. In fact, the relationship goes the other way. The authors demonstrate a strong negative mechanical relationship between expected total return and derivative income for covered-call strategies. They empirically validate this relationship over a nearly 25-year period on S&P 500 covered-call strategies. Those who have sought out and allocated to such strategies without accounting for this trade-off might have made a devil's bargain. [ABSTRACT FROM AUTHOR]
- Published
- 2024
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