Investors often turn to options for speculation or risk management. There are two main types: call options, granting the right to buy an asset at a set price within a certain time frame, and put options, allowing the sale at a set price within a specific amount of time.
Most investors commonly buy call options and put options for bullish market predictions or portfolio hedges, respectively. However, advanced investors can also take the other side of the trade by selling these options. In particular, selling call options using a buy-write, or covered call strategy, can be a lucrative way of generating investment income.
“Covered call writing involves selling call options on stock positions you own,” says Robert Johnson, professor of finance at Creighton University’s Heider College of Business. “Essentially, a covered call writer is forgoing some upside potential in exchange for additional current income.”
By selling a covered call option, investors agree to give up 100 shares of the underlying stock if its market price reaches a predetermined “strike” price by the expiry date. In exchange for selling the covered call, the investor earns a cash premium.
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“Typically, the closer the strike price of the call sold is to the price level of the asset initially, the higher the potential is for a higher premium,” says Chandler Nichols, product specialist at Global X ETFs. Other factors like the implied volatility of the underlying asset and the time until expiration can affect options premium sizes, too.
However, implementing a covered call strategy can be capital intensive and time consuming. Investors have to pony up enough capital to purchase 100 shares of the underlying asset, or actually own 100 shares of the stock to begin with, which can be difficult for stocks that trade at high prices.
In addition, investors have to actively manage the covered call strategy, selecting which strikes and expiry dates to pick, as well as calculating options Greeks, which are the mathematical variables that influence options pricing. To circumvent these barriers to entry, investors can delegate the hard work to a professionally managed covered call exchange-traded fund, or ETF. By buying shares of these ETFs like any regular stock, investors can get affordable, transparent and liquid exposure to a variety of covered call strategies.
“With a covered call ETF, the stock purchase, portfolio management and call writing decisions are left to a professional,” Johnson says. “By buying a covered call ETF, one doesn’t have to continuously monitor both the stock and options markets.”
Here are seven of the best covered call ETFs to buy right now:
| ETF | Expense Ratio | Trailing 12-month yield |
| Global X Nasdaq 100 Covered Call ETF (ticker: QYLD) | 0.60% | 12.6% |
| Global X Nasdaq 100 Covered Call & Growth ETF (QYLG) | 0.60% | 5.7% |
| JPMorgan Equity Premium Income ETF (JEPI) | 0.35% | 8.8% |
| Rex FANG and Innovation Equity Premium Income ETF (FEPI) | 0.65% | 25.1%* |
| KraneShares China Internet and Covered Call Strategy ETF (KLIP) | 0.95% | 47.9%* |
| Amplify CWP Enhanced Dividend Income ETF (DIVO) | 0.55% | 4.8%* |
| iShares 20+ Year Treasury Bond BuyWrite Strategy ETF (TLTW) | 0.35% | 17.9% |
*forward distribution rate
Global X Nasdaq 100 Covered Call ETF (QYLD)
“A covered call strategy’s income is derived from options premiums, which are influenced by the implied volatility of the underlying asset,” Nichols says. “Therefore, the higher the implied volatility, the higher the anticipated option premium, all else being equal.” A great example is the Nasdaq-100, which has seen strong bullish momentum throughout 2023, albeit at the cost of high volatility.
However, the ups and downs of the Nasdaq-100 is a bonus for covered call strategies that can enjoy higher premiums. Consider QYLD, which sells monthly at-the-money, or ATM, covered calls on 100% of its portfolio, which is designed to track the stocks in the Nasdaq-100. Currently, QYLD pays a very high 12.6% 12-month trailing yield. The ETF charges a 0.6% expense ratio.
Global X Nasdaq 100 Covered Call & Growth ETF (QYLG)
“Because writing call options on an existing long position in an underlying asset forfeits a level of upside potential, there are certain market environments where we’d expect covered call strategies to outperform and underperform,” Nichols says. In a bullish environment like this year, covered call strategies tend to lag as their assets are called away at the strike price below the market price.
To mitigate this, investors can consider an ETF like QYLG. This ETF also writes covered calls on the Nasdaq-100 index like QYLD, but with a crucial difference. Whereas QYLD sells ATM calls on 100% of its portfolio, QYLG only does so on 50% of its portfolio. The result is smaller income potential with a 12-month trailing yield of 5.7%, but better overall total return potential. QYLG also charges a 0.6% expense ratio.
JPMorgan Equity Premium Income ETF (JEPI)
One of the most popular covered call ETFs on the market is JEPI, which has attracted just over $30 billion in assets under management, or AUM, since its debut in May 2020. Unlike QYLD, JEPI’s stock selection is not based on an external index benchmark. Instead, the ETF’s management team actively selects stocks they believe will deliver the bulk of the S&P 500’s returns, but with lower volatility.
Augmenting this stock selection is a covered call strategy on the S&P 500. However, because JEPI actively picks its stocks, it does not have exposure to the entire S&P 500 necessary for directly selling covered calls. Instead, the ETF buys equity-linked notes from a counterparty, which provides synthetic exposure to a covered call strategy. JEPI charges a 0.35% expense ratio and pays an 8.8% 12-month yield.
[SEE: 9 Highest Dividend-Paying Stocks in the S&P 500]
Rex FANG and Innovation Equity Premium Income ETF (FEPI)
Covered call strategies don’t always stick to a broad market index. Consider the newly launched FEPI, which focuses on 15 equally weighted major U.S. technology, communications and consumer discretionary stocks. Notably, names in FEPI’s current portfolio include Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT), Apple Inc. (AAPL), Adobe Systems Inc. (ADBE) and Tesla Inc. (TSLA).
FEPI’s management team is able to sell covered calls on individual stocks, which will be out-of-the-money (OTM) to avoid limiting upside growth potential too much. The ETF also pays monthly distributions. FEPI’s most recent payment implies a very high 25.1% distribution rate assuming the distribution and share price stayed the same moving forward. The ETF charges 0.65%.
KraneShares China Internet and Covered Call Strategy ETF (KLIP)
For a covered call strategy that ventures into the emerging Chinese internet sector, investors can buy KLIP. This ETF holds the popular KraneShares CSI China Internet ETF (KWEB) as its underlying assets and then sells call options on KWEB. Thanks to KWEB’s high volatility, KLIP is able to generate huge options premiums, with a staggering 47.9% annual distribution rate implied by its latest monthly payment.
However, there are a few things to be aware of. The high annual distribution rate is a forward-looking metric based on the most recent distribution payment, which may not sustain itself moving forward. Investors should also be aware of geographic and sector-specific risks given KLIP’s concentrated focus. Finally, the ETF also charges a fairly high 0.95% expense ratio.
Amplify CWP Enhanced Dividend Income ETF (DIVO)
Investors looking for an actively managed covered call ETF with a small, high-conviction portfolio may like DIVO. This ETF selects a portfolio of large-cap U.S. stocks which exhibit above-average dividend growth and high financial quality. Its portfolio currently consists of blue-chip stocks like UnitedHealth Group Inc. (UNH), Microsoft, Visa Inc. (V), Walmart Inc. (WMT) and McDonald’s Corp. (MCD).
To increase income, DIVO sells covered calls on individual stocks, with strike prices and expiry dates left up to the discretion of the portfolio management team. So far, this approach has worked well, with DIVO achieving a five-star Morningstar rating among its category peers, meaning that it has outperformed the vast majority of rival funds on a risk-adjusted basis. DIVO pays a 4.8% distribution yield and charges 0.55%.
iShares 20+ Year Treasury Bond BuyWrite Strategy ETF (TLTW)
Investors who bought the popular iShares 20+ Year Treasury Bond ETF (TLT) in anticipation of an upcoming rate cut had to endure roller-coaster volatility throughout 2023, as long-term Treasurys continued to post losses. In contrast, TLT’s covered call cousin TLTW fared much better, posting a small 0.9% loss year to date as of Nov. 30, 2023 with all distributions reinvested, compared to a 5.7% loss for TLT.
By selling covered calls on TLT, as its underlying, TLTW was able to significantly outperform in 2023’s continued bond bear market. The higher-than-average volatility has helped TLTW generate a very high 17.9% trailing 12-month yield, which has helped cushion its performance. So far, this ETF has attracted around $825 million in AUM and charges a 0.35% expense ratio.
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Update 12/04/23: This story was previously published at an earlier date and has been updated with new information.
