A Deep Dive into U.S. Treasury Weekly Covered Call ETFs
An Optimized ETF for Patient Bets on Falling Rates
The Weekly Covered Call: TIGER U.S. 30-Year Treasury Premium
The timing of the U.S. Federal Reserve’s first interest rate cut—once expected as early as March—continues to be pushed back, reflecting the resilience of the U.S. economy. At the same time, warnings about the risk of renewed inflation persist. Yet the U.S. ISM Manufacturing Purchasing Managers’ Index, a key barometer of manufacturing activity, has failed to rise above the 50 threshold since November 2022. Weakness in commercial real estate is also spreading losses beyond Europe to financial institutions in Korea. While the overall direction of monetary policy still points toward easing, conflicting signals mean that patience is required.
Covered call strategies are built on the assumption of rising underlying asset prices—more precisely, a gradual upward trend. When bonds serve as the underlying asset, the core assumption becomes declining interest rates, with slower declines being preferable. In that sense, the current environment is well suited to this strategy.
There are three covered call ETFs in Korea that use long-term U.S. Treasuries as their underlying assets: KBSTAR U.S. 30-Year Treasury Covered Call, SOL U.S. 30-Year Treasury Covered Call, and the recently listed TIGER U.S. 30-Year Treasury Premium. Although their names reference “30-year Treasuries,” they actually hold portfolios of U.S. government bonds with maturities of 20 years or longer. The conservative “30-year” label likely reflects this long-duration focus. In practice, their effective duration—based on the weighted average of cash flows—is around 17 years.
The SOL and KBSTAR ETFs sell call options on the iShares 20+ Year Treasury Bond ETF (TLT) equal to the full market value of the bonds they hold. They allow participation in bond price gains of up to 2% per month, as the call options sold are out of the money (OTM) with strike prices set 2% above the underlying asset price. The option premiums collected through these sales fund monthly distributions.
By contrast, TIGER U.S. 30-Year Treasury Premium, listed on the 27th of last month, sells call options on only 30% of the bond portfolio’s market value. Instead, it chooses at-the-money (ATM) options, with strike prices close to the underlying asset price at the time of rebalancing. This means that while the portion covered by options does not participate in price gains, the remaining 70% remains fully exposed to bond price appreciation from falling yields. ATM options generate higher premiums than OTM options, compensating for the reduced upside participation.
Another distinguishing feature is the use of weekly options, which expire every Friday. Traditionally, U.S. options expire once a month on the third Friday. Weekly options effectively allow the strategy to sell options four times per month, reflecting the expectation of higher cumulative premiums compared with monthly options.
Using shorter-dated options presents both advantages and disadvantages. On the positive side, an option’s value consists of intrinsic value and time value. As expiration approaches, time value erodes rapidly—a phenomenon known as time decay. Because weekly options expire more frequently, covered call strategies can benefit from faster time decay and potentially higher aggregate premiums.
Shorter maturities also offer greater operational flexibility. With monthly options, managers must wait until expiration to adjust positions, limiting their ability to respond to unexpected market events. Weekly options, by contrast, allow for more frequent adjustments in response to changing market conditions.
The drawbacks include higher transaction costs, as more frequent trading naturally leads to increased commissions. Liquidity is another concern—often a component of transaction costs. Monthly options typically enjoy deeper liquidity, tighter bid-ask spreads, and higher trading volumes, making execution easier. Weekly options, while increasingly popular, may still be less liquid than their monthly counterparts.
Despite these drawbacks, the popularity of weekly options—and even zero-day-to-expiration (0DTE) strategies—continues to grow, driven by expectations of higher option premiums. In many cases, expectations shape reality. Backtests based on historical data often show that weekly option–based covered call strategies outperform monthly ones.
According to historical simulations conducted by Mirae Asset Global Investments, selling 100% OTM monthly call options on bond portfolios generated an average monthly premium of 1.08%. By contrast, selling ATM weekly call options on just 30% of the portfolio produced a similar premium of 1.15%. When 100% ATM weekly options were sold, the premium rose to 3.83%, more than three times that of the OTM monthly strategy.
ETFs that target a predefined premium—such as TIGER U.S. Tech TOP10 +10% Premium—are also entering the market. Given persistent macroeconomic uncertainty and the void left by structured products like equity-linked securities (ELS), 2024 is likely to see the continued expansion of ETFs employing diverse option strategies.
In an environment that demands patience rather than bold directional bets, weekly covered call Treasury ETFs may offer a more refined approach to navigating prolonged uncertainty around interest rates.