Call Spread Strategies for Income and Upside Participation
Understanding the Covered Call Misconception
YieldMax® ETFs are often described as “covered call ETFs.” While this description may reflect how option income strategies have traditionally been implemented, it no longer accurately represents how our ETFs are managed today and contributes to several common misconceptions about performance, upside participation, and NAV behavior.
YieldMax® ETFs primarily use call spread strategies rather than traditional covered call strategies, reflecting an evolution in how our option income portfolios are constructed. Importantly, YieldMax® ETFs should be described as option income ETFs, rather than covered call ETFs, to reflect the flexibility of the strategies used. This distinction is important because call spreads are designed to generate income while allowing for greater participation in the upside potential of the underlying stocks.
This paper explains how call spread strategies work, why they differ from covered calls, and how YieldMax® uses them to balance income generation with upside exposure.
The Evolution Toward Call Spread Strategies
Market conditions, investor objectives, and risk management considerations, in addition to persistent misconceptions around capped gains and limited upside, have driven the evolution from basic covered calls to call spread strategies.
Call spreads modify the traditional approach by combining two option positions rather than one. This adjustment changes the payoff profile and reduces the impact of a single short call limiting upside participation.
What Is a Call Spread Strategy?
A call spread involves two option positions on the same underlying stock.
- »1. Selling a call option at one strike price
- »2. Buying another call option at a higher strike price
The premium received from the sold call is partially offset by the cost of purchasing the higher strike call. This typically results in lower upfront income compared to a covered call but allows greater upside participation beyond the initial call strike, relative to traditional covered call strategies.
Credit Call Spread Example:
- »Stock owned at: $50
- »Sell call with $55 strike, collect premium: $2
- »Buy call with $60 strike, pay premium: $1
- »Net income (credit): $1
Key Points:
- »Breakeven: $49
- »Potential Loss: You are subject to losses if the stock price falls, but losses are offset by the $1 premium received.
- »Profit: remains constant while the stock price stays between the strikes (between $55 and $60). Above the long call strike, upside participation continues, subject to the structure of the spread and market conditions.
Single Stock Option Income ETF Simplicity
Many YieldMax® ETFs utilize an actively managed call spread approach designed around a single reference stock.
Each Single Stock Option Income ETF provides exposure to options strategies linked to a single reference equity, allowing investors to access income and upside participation in that stock without directly trading options themselves.
Key features include:
- »Professional management of options strategies on a single underlying stock
- »Systematic implementation of call spread positions
- »Exchange-traded fund convenience and daily liquidity
This structure allows investors to access options-based income strategies without managing options directly, while maintaining transparency and liquidity in an accessible ETF wrapper.
Diversification Through a Portfolio of Call Spreads
Rather than applying a call spread strategy to a single stock, some YieldMax® ETFs, such as CHPY, GPTY, and LFGY, implement call spreads across a portfolio of multiple underlying securities.
Using a diversified portfolio of call spreads can provide several potential benefits.
- »Diversification across multiple stocks rather than reliance on a single issuer
- »Broader sources of option income across different market movements
- »Reduced exposure to the risks associated with any one individual stock
By spreading option positions across multiple underlying securities, these strategies seek to manage risk while maintaining consistent exposure to income and upside participation opportunities.
Key Takeaways
- »YieldMax® ETFs are not traditional covered call ETFs
- »YieldMax® ETFs are best described as option income ETFs
- »Call spreads are the primary options strategy used
- »The strategy seeks income while retaining greater upside participation for investors
Final Takeaway
YieldMax® ETFs: Options for Your Income.
Our ETFs are designed to move beyond traditional option income approaches by balancing income generation with continued participation in the growth of the underlying stocks.
Learn more at www.YieldMaxETFs.com
Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus at www.YieldMaxETFs.com. Please read the prospectuses carefully before you invest.
Risk Information
Call Writing Strategy Risk. The path dependency (i.e., the continued use) of the Fund’s call writing strategy will impact the extent that the Fund participates in the positive price returns of the underlying reference asset and, in turn, the Fund’s returns, both during the term of the sold call options and over longer time periods.
Options Contracts. The use of options contracts involves investment strategies and risks different from those associated with ordinary portfolio securities transactions. The prices of options are volatile and are influenced by, among other things, actual and anticipated changes in the value of the underlying instrument, including the anticipated volatility, which are affected by fiscal and monetary policies and by national and international political, changes in the actual or implied volatility or the reference asset, the time remaining until the expiration of the option contract and economic events.
Derivatives Risk. Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with directly investing in securities or other ordinary investments, including risk related to the market, imperfect correlation with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of availability, counterparty risk, liquidity, valuation and legal restrictions.
The funds are distributed by Foreside Fund Services, LLC. Foreside Fund Services, LLC is not affiliated with YieldMax.