Maximizing Option Income with ETFs

Maximizing option income with ETFs is a strategy that can help investors earn regular income while minimizing risk. This can be achieved by using ETFs to generate income through options trading, such as selling covered calls or buying put options.

Selling covered calls can be a straightforward way to earn income from ETFs. By selling a call option on an ETF, an investor can collect a premium, which can be a source of regular income.

Investors can also use ETFs to buy put options, which can provide protection against market downturns while generating income. For example, an investor can buy a put option on an ETF that tracks the S&P 500 index to hedge against a potential market decline.

By diversifying an investment portfolio with ETFs, investors can potentially earn more income from options trading while reducing overall risk.

Derivative strategies are a type of investment approach that involves selling call options to generate incremental income.

Call options give buyers the right, but not the obligation, to buy a referenced security at a specified strike price on or before the option's expiration date.

The sellers of options, like those in covered-call funds, are required to deliver the referenced security to the buyer if the option is exercised.

The price of an option is called the "premium."

Many covered-call funds write options that expire monthly, but some write options that expire each day.

These funds provide exposure to equity markets via an index, such as the S&P 500, or an actively managed portfolio of stocks.

They are different from traditional ETFs because they also write call options on their underlying portfolios.

The type of income a fund produces can make a big difference when it comes to taxes.

Investment funds generate two main types of taxable income: ordinary income and tax-advantaged income.

Ordinary income is taxed at the same rate as wages, ranging from 10% to 37%.

Tax-advantaged income, like qualified dividends, is taxed at lower long-term capital gains rates of 0%, 15% or 20%.

Taxpayers with higher incomes are also subject to the 3.8% net investment income tax (NIIT).

Generally, covered-call funds have performed well in flat to modestly bullish markets, but they often underperform traditional long-only strategies in rising markets.

Covered-call funds typically underperform traditional strategies that haven't sold options because it's more likely that the call options they've sold will be exercised, and the fund will close its position by buying back the call option at a loss.

In 2020, the Dow Jones U.S. Dividend 100 index generated total returns of over 15%, while the S&P 500 Dividend Aristocrats Dynamic Coverage Covered Call index produced total returns of just 5.6%.

The average expense ratio of derivative income ETFs is 0.47%, which is over three times higher than the average expense ratio of U.S. Large Value Category ETFs.

Higher expense ratios can still drag on performance, even when covered-call ETFs perform best.

From 2013 to 2023, the Dow Jones U.S. Dividend 100 index significantly outperformed the S&P 500 Dividend Aristocrats Dynamic Coverage Covered Call index.

The Dow Jones U.S. Dividend 100 index is designed to measure the performance of high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends.

The YieldMax TSLA ETF is a unique option income strategy. It doesn't invest directly in TSLA, but rather focuses on the company's stock.

Investing in the YieldMax TSLA ETF involves a high degree of risk. The fund's strategy may not be suitable for all investors.

One of the key risks is Single Issuer Risk, which means that the value of the fund may be more volatile than a traditional pooled investment. The fund's value may perform differently from the market as a whole.

The fund's strategy will cap its potential gains if TSLA shares increase in value. This means that if the stock goes up, the fund's gains will be limited.

On the other hand, the fund's strategy is subject to all potential losses if TSLA shares decrease in value. This means that if the stock goes down, the fund's losses will be direct and not offset by income received by the fund.

As of 12/31/2024, the 30-Day SEC Yield for the YieldMax TSLA ETF is 3.27.

Investors are seeking reliable income in an uncertain world, where the path of interest rates is unclear.

Traditional sources of income may not be able to meet their needs, leaving investors unsure about their financial future.

Investors want certain income, and they're looking for it in the midst of uncertainty.

The growth potential of equities is also a priority for many investors, who are seeking a balance between income and growth.

Take advantage of no fee through June 30, 2025, to explore option income ETFs that can help you achieve your financial goals.

The Invesco QQQ ETF is a popular choice for investors, but did you know it has a companion fund designed to provide consistent monthly income and growth potential? QQA tracks the Nasdaq-100 Index, but with a twist to mitigate volatility and downside risk.

One thing to note about QQA is that it's designed to provide less volatility and downside risk compared to the QQQ, which is a good option for risk-averse investors. This is likely due to its focus on providing consistent monthly income.

Invesco also offers an even more income-focused option with its new options ETFs, which generate income by writing covered calls on the QQQ and S&P 500 indexes. These funds have a 30-day SEC yield of 11.43% and 10.78%, respectively, which is significantly higher than the QQQ and RSP.

The Invesco QQQ ETF has its own strengths, but let's take a look at the 10-year investment growth of similar funds.

The Dow Jones U.S. Dividend 100 Index has shown impressive performance over the past decade.

Higher expense ratios can drag on performance, even when markets move sideways, as seen in covered-call ETFs with average expense ratios of 0.47%.

This is significantly higher than the U.S. Large Value Category, which has a weighted average expense ratio of 0.15%.

Distributions from low-turnover funds that generate dividend income by holding U.S. and developed-market equities will be eligible to have dividend income taxed at the lower long-term capital gains tax rates.

On the other hand, income generated by selling options is typically taxed at the higher ordinary income tax rates, which can result in a larger tax drag on returns.

Invesco Launches New Options ETFs. These funds employ a strategy similar to Warren Buffett's in 1993, selling call options to collect upfront premium income.

They focus on two of the most popular stock indexes in the world: the QQQ and the S&P 500. The funds generate more income than the two popular indexes pay in dividends while offsetting some downside risk.

By writing covered calls, these funds sacrifice some upside potential. They agree to sell shares in the index at a set price, the opposite of Warren Buffett's agreement to buy Coca-Cola at a set price.

The funds charge an expense ratio of 0.29%, which is higher than many long equity-only ETFs. This higher cost is a tradeoff for the benefits they offer.

Investors benefit from a 30-day SEC yield of 11.43% and 10.78%, respectively. These yields are sharply higher than the yields offered by most long index funds, including the QQQ and RSP.

QQA strives to provide a high and consistent yield from premiums collected from an option income overlay, dividends from stocks in the Nasdaq-100 Index, and interest income.

The Distribution Rate is a key metric to understand QQA's consistent income potential. It's calculated by multiplying the most recent distribution per share by 12 and dividing by the ETF's most recent NAV.

Distributions are not guaranteed, but QQA's Distribution Rate can give you an idea of the potential annual yield. For example, if the most recent distribution per share is $1.2078, the Distribution Rate would be approximately 14.9% (calculated as $1.2078 x 12 / NAV).

Here's a breakdown of QQA's Distribution Rate history:

Note that the Distribution Rate and 30-Day SEC Yield are not indicative of future distributions, and future distributions may differ significantly from these rates. Distributions are variable and may vary significantly from month to month, and may be zero.

For those looking to diversify their option income ETF portfolio, there are several other ETFs worth considering.

Invesco DB Commodity Index Tracking Fund (DBC) offers a unique opportunity to invest in a diversified basket of commodities, including oil, gold, and agricultural products.

The iShares MSCI EAFE ETF (EFA) provides exposure to developed international markets, making it a solid addition to a globally diversified portfolio.

The iShares 1-3 Year Credit Bond ETF (CSJ) offers a low-risk investment option with a focus on short-term corporate bonds.

The SPDR S&P 500 ETF Trust (SPY) is a popular choice for investors looking to track the performance of the S&P 500 index.

An option is a financial instrument that gives the option holder the right, but not the obligation, to buy or sell a set quantity or dollar value of a particular asset at a fixed price by a certain date.

Options are a useful instrument for generating income outside of more traditional means, like collecting dividends on stocks or interest on bonds.

Selling options can generate income for investors, who collect an option premium from the buyer in exchange for giving them the right to buy or sell a specific asset.

This premium is considered income, and option income strategies can be an effective way of generating a steady stream of monthly income while maintaining exposure to equities.

Covered-call funds have generally performed well in flat to modestly bullish markets, often reporting higher-than-average yields due to selling options and delivering premiums along with dividends earned on stocks to investors.

In contrast, they tend to underperform traditional, long-only strategies in rapidly rising markets, as the call options sold are more likely to be exercised, capping their returns on the upside.

From 2013 to 2023, the Dow Jones U.S. Dividend 100 index significantly outperformed the S&P 500 Dividend Aristocrats Dynamic Coverage Covered Call index, showing the impact of missing the upside over longer time periods.

In 2020, the Dow Jones U.S. Dividend 100 index generated total returns of over 15%, while the S&P 500 Dividend Aristocrats Dynamic Coverage Covered Call index produced total returns of just 5.6%, highlighting the difference in performance between the two types of funds.

In 2018, the Dow Jones U.S. Dividend 100 index lost 5.4% while the S&P 500 Dividend Aristocrats Dynamic Coverage Covered Call index lost 4.3%, showing that covered-call funds may still generate losses in tandem with the overall market, even when the market drops.

A calendar year is a 12-month period that starts on January 1st and ends on December 31st. This is the standard timeframe for options contracts, which expire on the Saturday following the third Friday of the contract's expiration month.

Options contracts can be categorized into two main types: American and European options. American options can be exercised at any time before expiration, while European options can only be exercised on the expiration date.

The expiration date is a critical component of an options contract, as it marks the last day the option can be exercised. This date is typically the Saturday following the third Friday of the contract's expiration month.

Options contracts can be traded on various exchanges, including the Chicago Board Options Exchange (CBOE) and the New York Stock Exchange (NYSE). These exchanges provide a platform for buyers and sellers to trade options contracts.

The calendar year is also relevant when considering option expiration cycles. Options contracts typically expire on a quarterly or monthly basis, with the expiration date falling on the third Friday of the contract month.

The Distribution Details of the YieldMax TSLY Option Income Strategy ETF are quite interesting. The most recent distribution per share is $0.7170, declared on January 22, 2025, and payable on January 24, 2025.

The ex-date for this distribution is January 23, 2025, which means that any shares sold on or after this date will not be eligible to receive the distribution. The record date is also January 23, 2025, which is the date when the ETF's shareholders are determined to be eligible for the distribution.

Here is a table showing the distribution details for the past year:

As you can see, the distribution per share has varied significantly over the past year, ranging from $0.6448 to $2.1322. This is not unusual for an ETF that generates income through options trading.

Focused Options offer a unique way to generate income through call options. These options give buyers the right to buy a security at a specified strike price, but sellers are required to deliver the security if the option is exercised.

Income-focused Options ETFs have gained popularity, with some offering impressive year-to-date returns. For example, the YieldMax NVDA Option Income Strategy ETF has returned 126.8% so far this year.

Some key characteristics of Income-focused Options ETFs include AUM between $355M and $33B, and expenses ranging from 0.35% to 1.01%. They also offer yields between 0.4% and 47%.

Here's a breakdown of some popular Income-focused Options ETFs:

Keep in mind that these funds sacrifice upside potential, which can be a high opportunity cost.

An option is a financial instrument that gives the option holder the right, but not the obligation, to buy or sell a set quantity or dollar value of a particular asset at a fixed price by a certain date.

Options are a useful instrument for generating income outside of more traditional means, like collecting dividends on stocks or interest on bonds.

Currencies and futures are generally volatile and may not be suitable for all investors.

Options give the buyer the right, but not the obligation, to buy or sell a specific asset by a certain date at a predetermined price.

The seller of an option collects an option premium from the buyer, which is considered income. This premium can be an effective way of generating a steady stream of monthly income while maintaining exposure to equities.

Investments focused in a particular sector, such as technology, are subject to greater risk and more greatly impacted by market volatility than more diversified investments.

The seller of an option is required to deliver the referenced security to the buyer if the option is exercised. The price of an option is called the "premium."

Most funds that write call options expire monthly, but some write options that expire each day. This can make a big difference when it comes to the size of the bite taken by taxes.

Options are a financial instrument that gives the option holder the right to buy or sell a set quantity or dollar value of a particular asset at a fixed price by a certain date.

Options income is distinct from traditional income, driven by different sensitivities and factors.

Interest rate risk, a concern for bond holders, is avoided by equity options.

Equity options yields are instead influenced by implied equity market volatility.

Higher equity market volatility means higher option premiums and increased yields.

Traditional bond exposures are impacted by interest rate changes, whereas equity options are not.