Option Income ETFs : Are covered calls ETFs any good?

In investing, income-focused strategies appeal to those who prefer steady cash flow over high growth. One approach gaining attention is the options-based exchange-traded fund (ETF), which uses options strategies to generate income instead of relying solely on dividends or bond yields. In this article, we examine whether option-based income ETFs fit your investment goals.

What are Option Income ETFs?

Option income ETFs a.k.a options based ETFs operate by systematically deploying options strategies—usually selling calls or puts on underlying assets like individual stocks or broad indexes. Instead of simply holding stocks to capture dividends or capital gains, these ETFs harvest premiums generated by options trading. The income generated from selling these calls is then distributed regularly to shareholders, typically monthly.

This might sound appealing, especially in uncertain or range-bound markets, but the nuances of these strategies run deeper than surface-level appeal.

Key Considerations when exploring Options Based ETFs

While the immediate cash flow may be appealing, investors should weigh the trade-offs carefully. Over long market cycles, capped gains can significantly reduce total returns compared to direct asset holding, especially in rising markets.

Also, there’s volatility exposure. Covered call ETFs perform best in flat or moderately rising markets, where they can collect option premiums while sacrificing some upside potential. However, they remain exposed to capital losses if markets decline sharply.

In bear markets, you're exposed to downside similar to owning stocks outright—except that your ability to recover quickly during market rebounds may be constrained due to capped gains.

There’s also the matter of taxes. Income from option premiums is often taxed as short-term capital gains or ordinary income, rather than qualified dividends or long-term capital gains. Depending on how the ETF structures its trades—and your tax jurisdiction—this can significantly affect after-tax returns.

Types of Options based ETFs in the market

There’s a growing variety of options-based ETFs in the market, each designed with different strategies and risk profiles. Some target broad indexes, while others focus on individual high-volatility stocks. Below is a snapshot of the most popular funds, their strategies, and income potential.

Deep dive into QYLD vs QQQ 

Assuming a 10-year period, let's compare $1,000,000 invested in QYLD versus QQQ (the underlying ETF), with dividends not reinvested.

This 10-year comparison between QYLD and QQQ highlights the core trade-off between high dividend income and capital appreciation. If you had invested $1 million 10 years ago in QYLD, you would have received a substantial $1.15 million in dividends, providing consistent monthly income—possibly ideal for retirees needing reliable cash flow. 

However, that came at a cost: your original capital would have declined to $680,000, reflecting price erosion common with covered call ETFs. Your total value after 10 years would be approximately $1.83 million.

In contrast, QQQ—which tracks the Nasdaq-100 delivered modest dividends of about $194,175 over the decade, but its real strength was in capital growth. Your investment would have grown more than fivefold, reaching $5.2 million in capital value. When dividends are added, your total value climbs to $5.39 million. 

YieldMax option income ETFs strategy vs holding the underlying stock

Now let's compare YieldMax option-based ETFs with simply holding the underlying stock. Although both may track the same company, their results can vary greatly depending on market conditions.

The following comparisons illustrate how these differences play out in both growth and long-term dividend stocks.

NVDA vs NVDY Comparison

img source: https://totalrealreturns.com/s/NVDA,NVDY

A comparison of $10000 invested in NVDA vs NVDY 2023/05/11 to 2025/06/13.

$10,000 invested in NVDA would have grown to $46,916 (+369.2%)

$10,000 invested in NVDY would have grown to $28,624.40 (+186.2%)

While both delivered impressive returns, the difference reflects how they operate. NVDA captured the full growth of Nvidia's price surge. NVDY, meanwhile, sacrificed upside potential in exchange for high income payouts through call premiums.

This comparison highlights a core truth: when comparing a growth stock to an options-based ETF, you're essentially choosing between large potential capital growth and income generation. Growth stocks offer great upside and compound over time, which makes them ideal for long-term wealth accumulation. In contrast, options-based ETFs deliver high cash flow but limit the ability to benefit from sustained rallies.

JPM vs. JPMorgan Equity Premium Income ETF (JPMO)

img source: https://totalrealreturns.com/s/JPMO,JPM

To further emphasize the structural trade-off, let’s consider a blue-chip, long-term dividend-paying stock: JPMorgan Chase (JPM), compared with its options-based income ETF counterpart (JPMO), over the same period from 2023/05/11 to 2025/06/13.

$10,000 invested in JPM would have grown to $18,040.99 (+80.4%)

$10,000 invested in JPMO would have grown to $11,985.29 (+19.9%)

Here, the gap is even wider in percentage terms. While JPMO provides a more stable stream of income through its equity premium strategy, it also gives up a significant portion of capital appreciation.

Even with its underlying holdings anchored in quality blue-chip names, JPMO's reliance on call-selling strategies mechanically restricts upside, especially during periods of strong stock performance. 

Whether you’re considering a high-growth stock or a mature dividend payer, the same trade-off exists: options-based ETFs generally prioritize short-term yield over long-term growth.

Final Thought

Option income ETFs serve a specific role in portfolio construction. They offer investors access to option-based income strategies and more predictable cash flows. However, by design, these strategies trade off a portion of long-term capital appreciation for current income. For investors prioritizing long-term growth, direct equity exposure may deliver higher total returns depending on market conditions.

As with any investment, individuals should assess their financial objectives, risk appetite, tax situation, and market expectations before considering options-based ETFs as part of a broader investment strategy.