If you’re relying on your investment portfolio for regular income — whether you’re retired or pursuing FIRE (Financial Independence, Retire Early) — you might consider employing an options strategy specifically, selling covered calls on existing holdings.
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Suppose you own 100 shares of Microsoft Corp. (ticker: MSFT), which closed at $436.60 per share on Dec. 20. While Microsoft’s current dividend yield is modest at 0.76%, you could generate additional income by selling one call option.
By selling a covered call, you grant the buyer the right, but not the obligation, to purchase your shares at a set price, known as the strike price, by a specific expiration date. In return, you receive a premium, or upfront cash payment, for assuming this obligation. The call is “covered” because you have 100 shares of the underlying stock as collateral.
Looking at Microsoft’s options chain as of Dec. 23, you could sell a one-month covered call expiring on Jan. 24, 2025, with a slightly out-of-the-money (OTM) strike price of $440. This contract currently nets a premium of $10. For your 100 shares, that translates to $1,000 in cash upfront.
Assuming you could repeatedly sell the same contract for the same premium, this would result in a hypothetical annualized yield of approximately 28% against Microsoft’s current price. However, it’s important to note that option premiums fluctuate over time, so this yield is not guaranteed.
By Jan. 24, several outcomes are possible. If Microsoft’s market price stays below the $440 strike price, the call option will expire worthless. In this case, you keep the premium and retain your 100 shares, making it the best-case scenario for a covered call strategy.
But, if Microsoft’s market price exceeds the $440 strike price by expiry, the buyer can exercise the call. As a result, you would be forced to sell your 100 shares at $440. In this scenario, you’d keep the premium and any gains up to the strike price but miss out on any upside beyond $440, capping your returns.
On the downside, if Microsoft’s market price drops sharply by expiry, you still keep the premium but would incur an unrealized loss on the 100 shares you hold. The premium earned helps to offset some of this decline but doesn’t eliminate the risk entirely.
A covered call strategy is therefore not a free lunch, but rather another method of earning returns and adjusting your risk 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.
If you don’t have the capital to own 100 shares of a stock or lack the expertise for options trading, that’s okay. Covered call exchange-traded funds (ETFs) are available to do the heavy lifting for you.
“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:
| Fund | Forward Distribution Yield |
| Global X S&P 500 Covered Call ETF (XYLD) | 9.4% |
| Global X Nasdaq 100 Covered Call ETF (QYLD) | 11.6% |
| JPMorgan Equity Premium Income ETF (JEPI) | 7.0% |
| JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) | 9.3% |
| Amplify CWP Enhanced Dividend Income ETF (DIVO) | 4.4% |
| Amplify CWP International Enhanced Dividend Income ETF (IDVO) | 5.9% |
| Amplify CWP Growth & Income ETF (QDVO) | 7.5% |
Global X S&P 500 Covered Call ETF (XYLD)
XYLD tracks the Cboe S&P 500 BuyWrite Index. This benchmark represents a covered call strategy that systematically sells at-the-money, one-month-to-expiration options against the S&P 500 index. With this strategy, 100% of the ETF’s underlying holdings are covered. As a result, options premiums are maximized, leading to a high 9.4% forward distribution yield. However, there is a trade off.
Selling ATM covered calls on 100% of the portfolio significantly limits upside potential, as any gains beyond the strike price are forfeited. This can limit performance in long-trending bull markets. The consequence is lower total returns; with distributions reinvested, XYLD’s 10-year annualized return for net asset value (NAV) is only 6.7%. Additionally, the ETF charges a relatively high 0.6% expense ratio.
Global X Nasdaq 100 Covered Call ETF (QYLD)
The companion fund to XYLD is QYLD, which tracks the Cboe Nasdaq-100 BuyWrite V2 Index. This ETF follows the same strategy of selling at-the-money, one-month covered calls on 100% of its portfolio, but it uses the Nasdaq-100 Index, offering a more tech-focused and narrower set of holdings. It is also much more top-heavy than the S&P 500 with a higher concentration of mega-cap stocks.
QYLD currently pays a higher distribution yield of 11.6%, driven by the higher premiums generated from the greater volatility of Nasdaq-100 stocks compared to the S&P 500. All else being equal, more volatile stocks equals higher options premiums. However, like XYLD, the capped upside limits total returns; QYLD’s 10-year annualized total return for NAV is 7.9%. The ETF comes with a high 0.61% expense ratio.
[READ: 7 Best Russell 2000 ETFs to Buy]
JPMorgan Equity Premium Income ETF (JEPI)
A better historically performing alternative to XYLD is JEPI, which takes a different approach to its covered call strategy. Unlike XYLD, JEPI writes out-of-the-money S&P 500 index covered calls, generating less income but allowing for greater upside appreciation. While it benchmarks to the S&P 500, JEPI does not replicate it; instead, it actively selects a subset of S&P 500 stocks with lower volatility.
JEPI also implements its covered call strategy synthetically via equity-linked notes because it does not hold all the S&P 500 stocks required to sell standard options. This approach allows JEPI to maintain its income strategy while using an actively managed portfolio. Currently, the ETF offers a 7% distribution yield, though this can fluctuate with market volatility. JEPI also has a lower expense ratio of 0.35%.
JPMorgan Nasdaq Equity Premium Income ETF (JEPQ)
If you’re not satisfied with QYLD’s total returns and don’t mind a slightly lower yield in exchange for historically better performance, JEPQ offers an alternative. This ETF writes OTM calls on the Nasdaq-100 Index through equity-linked notes and follows a similar active strategy of selecting a less volatile subset of stocks from the index. As with JEPI, JEPQ pays monthly distributions.
As noted earlier, the higher the volatility of the reference asset, the greater the premiums covered call strategies tend to generate. Unsurprisingly, JEPQ delivers higher income potential than JEPI, currently offering a 9.3% distribution yield. It also charges the same low expense ratio of 0.35%, making it a cost-effective choice for investors seeking tech-focused income with moderate upside potential.
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.
DIVO begins with a concentrated portfolio of 25 to 30 blue-chip stocks selected for financial quality and dividend growth. The fund sells OTM covered calls but does so on individual stocks and can vary its coverage ratio. This strategy has helped DIVO achieve a competitive 12.6% five-year annualized return with lower volatility. However, the ETF’s distribution yield is lower at 4.4%.
Amplify CWP International Enhanced Dividend Income ETF (IDVO)
Income investors who like DIVO’s tactical approach to covered calls can diversify further with 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.”
This ETF follows a similar strategy by selecting high-quality, dividend growth stocks from the MSCI ACWI ex USA index with good earnings growth and free cash flow. The portfolio of 30 to 50 holdings is complemented with the OTM covered call strategy on individual stocks. Currently, investors can expect a 5.9% distribution yield — 3% to 4% yield from dividend income, and 2% to 4% from options premiums.
Amplify CWP Growth & Income ETF (QDVO)
DIVO and IDVO feature defensive portfolios of blue-chip companies. While this can help lower volatility, it also limits the yield from options selling. For a higher-risk, higher reward alternative, Amplify offers QDVO. This ETF actively picks growth stocks with a technology, consumer discretionary, and communications focus. Then, it employs the same OTM covered call strategy on individual holdings.
“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.” Investors can currently expect a 7.5% distribution yield, higher than DIVO and IDVO.
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7 High-Yield Covered Call ETFs Income Investors Will Love originally appeared on usnews.com
Update 12/26/24: This story was previously published at an earlier date and has been updated with new information.
