Bond ETF Covered Calls

In reference to comments received from CCWriter in my post regarding asset allocation, I wanted to give a brief post about Bond ETF covered calls. I did a quick search of the landscape and found the following.

There are 14 Taxable Bond ETF's and 1 Municipal Bond ETF which offers options. Of those ETF's, 8 actually had both enough interest, and an OTM option premium which had a bid price above 0.

This screen left me with the following ETFs:

iShares Barclays 20+ Year Treasury Bond (TLT)
iShares Barclays 7-10 Year Treasury Bond (IEF)
iShares Barclays TIPS Bond (TIP)
iShares Barclays Aggregate Bond (AGG)
iShares iBoxx $ High Yield Corporate (HYG)
iShares iBoxx $ Invest Grade Corporate (LQD)
UltraShort 7-10 Year Treasury ProShares (PST)
UltraShort 20+ Year Treasury ProShares (TBT)

I would personally not recommend investing in the ultrashort bond etf's mostly on principle, though they do provide the highest possible returns.

Of the other Bond ETFs listed above only TLT, IEF, and HYG would result in a greater than 1% return if you sold the OTM call immediately above the current price. This is assuming the bid price is your option premium, and no commissions. I would point out however, that only the IEF and TLT have bid/ask spreads that are less than 20% apart from each other. This is important when considering options because it generally means there is adequate liquidity in the options for that stock/etf.

I hope this has helped those of you who are considering a Bond ETF covered call as it has been quite an informative exercise for me.