Part 2: Different approaches to covered call ETFs

Published date: 19th August 2025 | Author: Tom Bailey

Part 1: Understanding covered call ETFs→

Balancing income and growth: fully vs. partially covered strategies

Covered call ETFs don’t all work the same way. One of the key differences is how much of the ETF’s stock portfolio is used to sell options.

Some funds sell call options on 100% of their stocks. Others sell options on only part of the portfolio – say, 50% – to leave more room for share prices to rise. This is called being “fully covered” versus “partially covered.”

The image below shows how these different approaches behave depending on how the market moves during a given month.

Source: REX Shares. Illustrative monthly returns across different strategies assuming a 7% OTM strike and monthly call premium of 2% (100% coverage) / 1% (50% coverage). Premiums vary based on market and individual stock volatility.

The grey line shows a regular investment in stocks, with no options. If the market goes up by 10%, your return is 10%. If it falls 5%, your loss is 5%.
The dark blue line shows a fully covered call strategy (selling options on 100% of the stocks). This strategy earns steady income from selling options, so it performs better when prices fall or move sideways. But if stocks rise sharply, gains are capped because the ETF has agreed to sell the shares at a set price.
The light blue line shows a 50% covered strategy. This still earns some income but also allows more room to benefit from rising prices. It sits somewhere in between the other two lines.

In summary:

Fully covered strategies often provide more income and more protection in falling or flat markets, but less upside in strong rallies.
Partially covered strategies aim to balance income and growth, giving investors more exposure to rising markets while still earning some extra income.

“There’s no one-size-fits-all answer – it depends on your goals and how much upside potential you’re willing to trade for added income.”

Choosing the strike price: balancing income and growth

Another important decision covered call ETFs make is where to set the strike price – the price at which they agree to sell a stock if the option is exercised. This decision is made by the ETF’s manager, but it can have a big impact on the fund’s income and growth potential. As a result, investors may choose an ETF based on the manager’s typical strike-setting approach.

Covered call ETFs usually sell options with strike prices that are above the current share price. This gives the stock room to rise before the ETF is required to sell it, while still collecting income from the option.

But how far above the current price the strike is set matters. It affects both how much income the ETF earns and how much upside it keeps if the stock rises.

Here’s the trade-off:

Setting the strike close to the current price – say 1% above – brings in more income, because the option is more likely to be used.
Setting it further away – say 5% above – brings in less income, but leaves more room for gains if the stock rises.

In the chart below, strike prices are shown using shorthand numbers:

Source: REX Shares. For illustrative purposes only. The above chart illustrates hypothetical estimated monthly premium yields from call options strikes 1% out of the money (“101 C”), 3% out of the money (“103 C”) and 5% out of the money (“105 C”). While the ‘strike lines’ converge at implied volatilities below 25%, the 105 C line steepens in the implied volatility ‘sweet spot’ above 30% in support of the Rex individualized EPI approach.

101 means 1% above the current price
103 means 3% above
105 means 5% aboveThe lines show how much income is generated at different levels of expected market volatility – that is, how much the market is expected to move.

As you can see:

When markets are calm and prices aren’t expected to move much, only the lower strike options (like 101) generate meaningful income.
When markets are more volatile, even further-out strikes like 105 can deliver attractive income, while also giving more room for stock gains.

This is one reason some covered call ETFs focus on stocks with higher volatility – it gives them more flexibility to earn income without giving up too much potential growth.

Conclusion

Covered call ETFs offer a simple idea with powerful potential: use the stocks you already hold to generate extra income. By selling call options, these funds can create a steady stream of income that’s especially useful when markets are flat or uncertain.

But they come with trade-offs. The income is earned by giving up some of the upside if stocks rise sharply. And not all covered call ETFs are the same – they can differ in how much of the portfolio they cover, how far above the market they set strike prices, and how they balance income versus growth.

For income-focused investors, especially those looking to diversify beyond traditional dividends, covered call ETFs can be a useful addition to a portfolio. Understanding how they work and how different strategies are structured can help you choose the fund that best fits your goals.

Click here to read part 1: Understanding covered call ETFs

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Part 2: Different approaches to covered call ETFs

Part 1: Understanding covered call ETFs→

﻿ “There’s no one-size-fits-all answer – it depends on your goals and how much upside potential you’re willing to trade for added income.”

Click here to read part 1: Understanding covered call ETFs

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“There’s no one-size-fits-all answer – it depends on your goals and how much upside potential you’re willing to trade for added income.”