Published date: 19th August 2025 | Author: Tom Bailey
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.
In summary:
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:
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.
As you can see:
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.
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