2 ETFs to Maximize Gains With Covered Call Strategies

Key Points

• A covered call strategy entails selling a call contract on a stock you’re holding to collect the premium as income, in essence, 
• A covered call strategy can generate income but requires active management and has the potential for losses if the stock collapses on the news, like an earnings report.
• Executing a daily covered call strategy on the benchmark indices can generate higher income but requires more time and effort to pursue manually.  

A potentially fruitful stock options strategy known as writing covered calls can be performed on stocks you own to collect additional income during every options expiration period. It can be lucrative to compound the gains. Still, it comes at the cost of time and effort to manage and monitor the position and potential losses if your stock suddenly plunges on material events (IE, earnings reports). For many, writing covered calls on a regular basis is just too tedious of a task. For those who wish to pursue this income-producing strategy without having to manage it manually, here are 2 ETFs that implement the covered call strategy on the benchmark indices, enabling you to participate passively.

The Mechanics of a Covered Call Strategy

Writing covered calls on stocks you own is metaphorically like collecting rent on those stocks. You own the stock, then write a covered call option to collect the premium. Writing a covered call is also referred to as shorting/selling the call option. The discretionary factors come into play when trying to select the strike price and the expiration date. The further out the expiration and closer to the strike price, the more premium you collect and the higher the risk of being assigned. This means having your stock sold from your portfolio at the selected strike price, especially if it’s trading well above the strike price.

ISPY: Daily Covered Call Strategy on the S&P 500 Index

The ProShares S&P 500 High Income ETF NYSEARCA: ISPY executes the covered call strategy on the S&P 500 Index.

The ETF mirrors the strategy of owning long positions on the S&P 500 index while writing/shorting the S&P 500 index call options.

Rather than using monthly or even weekly call option contracts, the ISPY’s strategy uses daily call options.

The Advantage of Daily Call Options

In fact, ISPY is the first of its kind to do a daily call option strategy. To replicate this manually would involve much more active management than a weekly or even a monthly covered call strategy. The ISPY tracks the performance of the S&P 500 Daily Covered Call Index. This index measures the performance of a long position in the S&P 500 and a short position in the standard S&P 500 daily call option. The advantage of a selling daily call option is that the Theta (time decay) erodes much faster, which means faster profits if you're a seller, versus a monthly call option, where the Theta rises quickest in the final week of expiration. Daily call options also provide more flexibility to adjust the position more frequently if the market moves against you.

Keep in mind that the SPY ETF represents the S&P 500 index, which is heavily weighted to the computer and technology sector at 31.61% and the finance sector at 13.89% as of Jan 16, 2025. ISPY pays a $4.36 dividend or 9.67% annual yield paid out monthly, which is an additional benefit for income seekers. The ISPY is up 1.69% year-to-date (YTD) as of Jan 16, 2025.

IQQQ: Daily Covered Call Strategy on the Nasdaq 100 Index

The ProShares Nasdaq-100 High Income ETF NASDAQ: IQQQ executes a covered call strategy on the Nasdaq 100 index. This index is more volatile than the S&P 500 index due to the larger proportion of higher beta technology stocks. The IQQQ ETF utilizes systematic swaps on the whole Nasdaq 100 index.

The IQQQ is mostly identical to the ISPY, except that it executes the covered call strategy on the Nasdaq 100 index. There are inherently fewer dividend stocks in the Nasdaq 100 index, which is why the $3.10 dividend, or 7.17% annual yield paid out monthly, is less than the ISPY. The IQQQ is up 1.41% YTD as of Jan 16, 2025.