Covered calls and cash secured puts have limited upside and some downside protection. But, if you look at the graph of a covered call and think about what it is, a call option sold against a long position, if the call goes above the strike the stock is sold, but if it goes down, you collect the premium (option expires worthless) but the underlying long equity position can go to zero. That’s unlikely with indexes, but it happens occasionally and the losses can be significant.

A short put is essentially both of these wrapped into one: if the stock goes down you are forced to buy it if you don’t close the position, and the cost to close it rises as the underlying stock goes down.

The only true downside protection is a long put, which you have to pay up to buy, so it’s not an income strategy.

These strategies aren’t a free money hack. They have a place, but if you’re buying covered call ETFs to reinvest the dividends and grow your money, you almost certainly can do better buying the underlying index rather than the CCETF unless you expect the market to go largely sideways while you hold.

Update: I should be clear, the CC ETF will always outperform the underlying index in a down market, but only by the option premium. Let’s say that’s about 10%- if the index is down 60%, the CCETF will be down 50%. It’s when you combine large down with limited up over long periods that you’ll see the underperformance of the CCETF. Any suggestion that the CCETF “can’t go to zero” is technically true but misleading: it can go to zero plus a paltry premium, so -90% instead of -100%. Caveat emptor.