A covered call strategy is an investing technique that saves one from market selloffs to quite an extent. The strategy involves holding a long position in a stock and selling call options on it to generate additional income. During a selloff, while the primary stock position loses value as its price falls, the premium from call options can partially cushion it.
In this strategy, there are two benefits. First is income generation, which implies premiums from selling options and second is downside protection, in which the premiums provide a small protection from potential losses in the stock.
Historically, covered call strategies have outperformed their underlying securities in bear, range-bound, and moderate bull markets but lag during strong bull rallies when securities frequently and sharply exceed their strike prices.
Why Invest in Covered Call Strategy Now?
Wall Street has been experiencing extreme volatility lately due to tariff fatigue and recession fears. President Trump's tariff impositions have weakened the U.S. consumer and business sentiment lately, as entities grow uncertain about the “chaotic” U.S. policy. SPDR S&P 500 ETF Trust SPY has lost about 5% so far this year (as of March 11, 2025).
According to Goldman Sachs strategists, any rebound in the S&P 500 Index is expected to be short-lived due to concerns about the U.S. economy, as quoted on fortune.com. Goldman’s GDP growth projection for 2025 now sits at 1.7%, down from 2.4% at the start of the year (read: Recession Fears Looming? Secure Your Portfolio With These ETFs).
Goldman strategist David Kostin emphasized that a stronger U.S. economic growth outlook is necessary to fully reverse recent equity market weakness. Reflecting this outlook, he has revised his full-year earnings growth estimate downward from 11% to 9%. Kostin now predicts that equity returns in 2025 will be more modest, aligning with the trajectory of earnings growth.
Economic data for the first quarter of 2025 indicates a potential contraction, according to the Federal Reserve Bank of Atlanta's GDPNow tracker, as quoted on CNBC. The model now predicts a 1.5% decline in GDP for the January-to-March period, a sharp decline from its earlier projection of 2.3% growth (read: Q1 to See Economic Contraction? ETFs Likely to Win).
As a result, investing in a covered call strategy could be beneficial now. Below, we highlight a few covered-call exchange-traded funds (ETFs) that could be proper investments at the current level.
Covered Call ETFs in Focus
TappAlpha SPY Growth & Daily Income ETF TSPY
The ETF TSPY looks to participate in S&P 500 growth via SPY. The ETF sells daily (0DTE) options with the goal of generating high income. It aims to reduce volatility and account for risk with execution. The ETF charges 68 bps in fees and yields 7.59% annually.
Global X Nasdaq 100 Covered Call ETF QYLD
The underlying CBOE NASDAQ-100 BuyWrite V2 Index measures the total return of a portfolio consisting of common stocks of the 100 companies included on the NASDAQ-100 Index and call options systematically written on those securities through a buy-write or covered call strategy. The fund charges 61 bps in fees and yields 13.63% annually.
S&P 500 Covered Call ETF XYLD
The underlying Cboe S&P 500 BuyWrite Index seeks to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. The fund charges 60 bps in fees and yields 12.42% annually.
Roundhill N-100 0DTE Covered Call Strategy ETF QDTE
This ETF is active and does not track a benchmark. The fund is the first ETF to utilize zero days to expiry (“0DTE”) options on an innovation index (the "Innovation-100 Index" as defined in the Fund Prospectus). QDTE seeks to provide overnight exposure to the Innovation-100 Index and generates income each morning by selling out-of-the-money 0DTE calls on the Index. The fund charges 95 bps and yields 43.24% annually.
JPMorgan Equity Premium Income ETF JEPI
The JPMorgan Equity Premium Income ETF seeks current income while maintaining prospects for capital appreciation. The ETF’s equity portfolio employs a time-tested, bottom-up fundamental research process with stock selection based on our proprietary risk-adjusted stock rankings. Disciplined options overlay implements written out-of-the-money S&P 500 Index call options that seek to generate distributable monthly income. The fund charges 35 bps in fees and yields 7.52% annually.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
