Covered Call ETF

A covered call ETF combines equity ownership with an options selling strategy to generate enhanced income. The fund owns underlying stocks and systematically sells call options against those holdings, collecting premium payments that boost yield.

How Covered Calls Work

When you sell a call option, you give someone the right to buy shares from you at a set price (strike price) before a certain date. In exchange, you receive an upfront payment (premium). If the stock stays below the strike, you keep the premium. If it rises above, your shares get "called away" and you miss further gains.

The Trade-Off: Income vs Growth

Covered call strategies exchange upside participation for current income. In flat or declining markets, these funds often outperform because the option premium provides a buffer. In strong bull markets, they typically lag because gains are capped at the strike price.

Types of Covered Call ETFs

1. Index-Based (XYLD, QYLD): Sell calls on entire indices like S&P 500 or Nasdaq 100 2. Active/Selective (JEPI, JEPQ): Use equity-linked notes or selectively write calls 3. Single-Stock (TSLY, NVDY): Sell calls on individual high-volatility stocks 4. 0DTE Strategies (SPYI, QQQI): Use daily expiration options for higher premium capture

Risk Considerations

While labeled "covered" (owning the underlying), these strategies still carry significant risks: NAV erosion in prolonged bull markets, tax inefficiency from short-term gains, and complexity from derivative instruments.