On investing forums like Reddit’s WallStreetBets, you might notice some traders speculating on high-risk options plays. These individuals are hoping for a “moonshot” or a “10-bagger,” both terms used on social media for speculative investments that have the potential to yield exceptionally high returns.
But there’s a more conservative and smarter way to trade options that offers a steady income stream — by selling them, rather than buying.
For instance, suppose you own 100 shares of a hypothetical company. By selling a call option on these shares, you grant another investor the right, but not the obligation, to buy these shares from you at a predetermined price (the strike price) before the option expires. This is called writing a covered call.
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When you sell this call option, you collect a premium. This is money paid by the buyer of the option to you, the seller. The amount of this premium varies based on factors like the strike price relative to the current market price (moneyness), the time until expiration and the underlying stock’s volatility.
The best-case scenario for covered call sellers is if the underlying stock remains flat. In this case, the option is likely to expire worthless, and you have a good chance of retaining both the stock and the premium. This makes it a lucrative approach for generating income in a sideways market. However, if the stock price tanks, the premium you received can offset losses, but only to a certain extent. Conversely, if the stock surges above the strike price, the option may be exercised, forcing you to sell at the agreed price, potentially missing out on further gains — here, the premium may not fully compensate for the lost upside potential.
In essence, when you sell a covered call, you’re trading the possibility of higher future profits for immediate income. It’s not a free lunch — rather, think of this strategy as a way to redefine your investment’s risk and return profile.
“Essentially, a covered call writer is forgoing some upside potential in exchange for additional current income,” says Robert Johnson, professor of finance at Creighton University’s Heider College of Business.
Even if you lack options trading experience or the capital required to own 100 shares of a stock to sell a covered call, you can still access covered call strategies through various exchange-traded funds (ETFs). These funds manage the process on your behalf, allowing you to participate in this income-generating strategy without needing to directly trade options.
“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 | Distribution yield* |
| Global X S&P 500 Covered Call ETF (ticker: XYLD) | 9.8% |
| Russell 2000 Covered Call ETF (RYLD) | 11.8% |
| Amplify CWP Enhanced Dividend Income ETF (DIVO) | 4.7% |
| Amplify CWP International Enhanced Dividend Income ETF (IDVO) | 5.9% |
| Amplify CWP Growth & Income ETF (QDVO) | 6.9% |
| REX FANG & Innovation Equity Premium Income ETF (FEPI) | 25.3% |
| REX AI Equity Premium Income ETF (AIPI) | 34.5% |
*As of Oct. 14 market close.
Global X S&P 500 Covered Call ETF (XYLD)
XYLD systematically sells at-the-money (ATM), one-month-to-expiry options against the S&P 500 index to generate income. This approach aims to produce a high distribution rate, currently at 9.8%. In 2022, a bear market year, XYLD’s total return was -12.1%, which outperformed the SPDR S&P 500 ETF (SPY) that returned -18.2%, illustrating how covered call strategies can provide a buffer in downturns.
However, the inherent trade-off with covered calls — forgoing some upside potential — means that in strong bull markets, these strategies may lag. For example, in 2023, XYLD underperformed relative to SPY, earning a total return of 11.1% versus SPY’s 26.2% as its underlying holdings were continually called away at lower-than-market prices due to the use of ATM calls. XYLD charges a 0.6% expense ratio.
Russell 2000 Covered Call ETF (RYLD)
Another rule of thumb for covered calls is all else being equal, the higher the implied volatility of the underlying asset, the greater premiums tend to be. This mechanic is why RYLD, which sells ATM, one-month-till-expiry calls on the Russell 2000 index, yields more than XYLD does. The small-cap stocks that make up the Russell 2000 tend to fluctuate up and down more than the S&P 500 does.
RYLD’s distribution yield currently sits at 11.8%, significantly higher than XYLD. If you want to own small-cap stocks with a higher yield, this ETF is one of the few options out there. As long as the volatility of small-cap stocks remains elevated, investors can expect RYLD to pay out high yields. However, be aware that as with XYLD and QYLD, the upside for RYLD is capped. This ETF charges a 0.6% expense ratio.
Amplify CWP Enhanced Dividend Income ETF (DIVO)
“Unlike most index-based covered call ETFs that write calls robotically at set times, DIVO’s actively managed approach not only allows the manager to monitor holdings each day to ensure they meet quality and valuation metrics, but it also provides the flexibility to take advantage of timely opportunities by writing calls on individual stocks,” says Christian Magoon, CEO of Amplify ETFs.
Unlike the Global X covered call ETFs, DIVO does not track an index. The ETF selects a concentrated portfolio of 20 to 25 quality dividend growth stocks. Then, the ETF sells out-of-the-money (OTM) calls on individual stocks, with discretion to vary expiry dates. This helps DIVO capture higher upside price appreciation, although the ETF’s distribution yield is lower, at 4.7%.
Amplify CWP International Enhanced Dividend Income ETF (IDVO)
The success of DIVO spawned an international counterpart in the form of IDVO. “IDVO owns high-quality, dividend-paying international stocks while maintaining the ability to tactically write covered calls on individual stocks,” Magoon says. “Foreign stock exposure will further diversify a U.S. stock portfolio and perhaps increase total return potential.” Right now, IDVO pays a 5.9% distribution yield.
IDVO’s holdings are selected from the MSCI ACWI ex USA index. Amplify focuses on high-quality, large-cap stocks with favorable dividend growth, earnings growth and cash-flow growth. As with DIVO, IDVO features a concentrated portfolio of 30 to 50 holdings. The ETF expects to generate around a 3% to 4% yield from dividend income, and 2% to 4% from covered call premiums.
Amplify CWP Growth & Income ETF (QDVO)
Growth stocks tend to pay little to no dividends, as excess cash is typically reinvested back into the company. However, income investors can get around this by selling covered calls. The ETF to use for this role is QDVO, which selects 20 to 40 large-cap stocks with strong earnings and cash-flow growth metrics. As with DIVO and IDVO, QDVO will sell covered calls tactically on individual companies.
“QDVO aims to provide both growth and consistent monthly income by focusing on high-growth U.S. equities, paired with a tactical covered call strategy,” Magoon says. “This approach allows for dynamic call writing, enabling the portfolio managers to seize opportunities while managing risk.” Currently, QDVO is paying a high 6.9% distribution yield thanks to the higher volatility of its holdings.
REX FANG & Innovation Equity Premium Income ETF (FEPI)
“While covered call strategies have been used for decades, the current challenges in fixed income and the unpredictability of the Fed have helped their adoption,” says Scott Acheychek, chief operating officer at REX Financial. “Covered call ETFs therefore present an opportunity to generate income from stocks, a risk asset that many investors are already comfortable with.” A unique ETF to watch here is FEPI.
This ETF tracks the FANG & Innovation Index, a benchmark of 15 equally weighted mega-cap tech companies, including the “Magnificent Seven” stocks such as Nvidia Corp. (NVDA), Meta Platforms Inc. (META), Apple Inc. (AAPL), Tesla Inc. (TSLA), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN) and Alphabet Inc. (GOOGL). A covered call overlay on these stocks produces a 25.3% distribution yield.
REX AI Equity Premium Income ETF (AIPI)
Covered call strategies are highly versatile. The previous ETFs profiled sold covered calls on indexes, individual blue-chip stocks and tech stocks. For an even more targeted approach, investors can buy AIPI. This ETF writes calls on stocks found in the BITA AI Leaders Select Index, a thematic benchmark of major U.S. companies that have significant involvement in artificial intelligence technologies.
“AIPI’s strategy of writing call options on individual stocks, rather than on the broader indexes, capitalizes on the volatility of the individual names to collect higher option premiums, while striking the options out of the money, which allows for net asset value growth potential,” Acheychek says. Investors can currently expect a high 34.5% distribution rate from AIPI, although this can fluctuate.
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7 High-Yield Covered Call ETFs Income Investors Will Love originally appeared on usnews.com
Update 10/15/24: This story was previously published at an earlier date and has been updated with new information.
