While covered call exchange-traded funds (ETFs) are widely used by investors, they do not come without risk.
Here’s why I’m personally staying on the sidelines – and one of my favorite options trading strategies you can follow instead.
What’s Wrong with Covered Call ETFs?
These ETFs, as their name implies, use covered call strategies to generate income for holders. The funds will typically hold a portfolio of stocks or other assets while simultaneously selling call options on those same assets. The premiums earned from this strategy serve as income for ETF holders and position the funds as “high-yield ETFs.”
These funds don’t claim to have the ability to offset sharp declines in the stock market. And as has been proven repeatedly, they don’t.
However, investors diving headfirst into covered call ETFs in 2025 may not realize this because the stock market has been rallying back from downturns quickly. This means that the impact of any downturn has not been lasting enough to “wake up” holders of these ETFs.
Is There a Better Way?
Unlike options collars, my preferred options trading strategy, the lack of put protection in covered call ETFs means that the fund writes calls on its portfolio and rakes in, let’s say, 1% a month in option premium. This looks great on paper and creates the fine-looking dividend yields you see below.
But keeping that return is not as easy as it looks.
For example, if the basket of stocks in the ETF falls 20% over 5 months, only one-fourth of that decline is offset. The rest is little different than owning the stocks unhedged.
The Case for Options Collars Instead of Covered Call ETFs
Instead of chasing covered call ETFs, I would like to recommend my favorite approach: options collars. That’s where you buy a stock or ETF you think will go up, but couple it with a pair of options.
One is a “covered” call option, thus labeled because the option writer (seller) is at risk of being forced to sell 100 shares of stock if “called” upon before the option expires. If they don’t own the stock they are at risk of having to scramble to get some, just at the wrong moment, when the stock has run up in price.
The collar is completed by also buying put options, typically near or below the current stock price. That sets the price below which the investor can say “I’m selling,” no matter how low the stock goes. Of course, there’s an expiration date on both types of options.
So this option collar “deal” is available for a limited time. But the investor gets to customize the price ranges they want for each stock or ETF they collar, as well as the time frames. The only limitations are the strike prices and expiration dates of options available on a particular ticker.
The Bottom Line
As you can probably tell, that takes some effort. In recent articles here, I’ve included screenshots and links to find this collar information at Barchart.com. While I would love to be able to recommend covered call ETFs for investors who aren’t interested in doing their own options collar research, I can’t. The risk outweighs the reward, except for the extremely patient.
On the date of publication, Rob Isbitts did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
