Up To 15.04% Potentially From Covered Calls

Up to 15.04% cash distributions on the NASDAQ 100 & up to 12.50% cash distributions on the S&P 500: what is a call option and how does it work, why might an investor trade call options, and what's our perspective on covered call strategies?

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Up to 15.04% cash distributions on the NASDAQ 100 and up to 12.5% cash distributions on the SP 500. Is extra income with no extra risk really possible with covered call strategies? Hello, Diamond Estec Members, Super Savers and Course fans. I hope you're healthy and well. Covered call strategies, meaning selling covered call options on your equities, has been a highly requested member topic in our VIP Investment Club over the past few months. And what makes them so interesting can be summarized in three points. First, covered call strategies can potentially generate additional income from an equity portfolio. Second, covered call strategies have a very conservative risk profile, meaning they will never generate any direct losses in your portfolio. And third, they are easily accessible. For example, JPMorgan offers two popular ETFs that have covered calls as their secret sauce, so to speak. JEPI, the JPMorgan Equity Premium Income ETF, with a cash distribution yield of 8.4%, and JEPQ, the JPMorgan Nasdaq Equity Premium Income ETF, with a cash distribution of 11.11%. And not too long after JP Morgan, relative newcomer NEOS Investments launched SPYI, the NEOS SP 500 high income ETF, with a current cash distribution yield of 12.5%, as well as QQQI, the NEOS NASDAQ 100 high income ETF, with a current cash distribution yield of 15.04%. All cash distribution yields in this video are the latest trailing 12-month yields as per Morningstar at the time of this taping on April 9th, 2026. And please note that these numbers change all the time. So do check for the latest updates whenever you're watching this video. Now, ETFs are not the only way to implement covered call strategies. You can also sell covered calls on your stocks yourself. There is always a flip side though, regardless of whether you buy an ETF or implement a covered call strategy yourself. There are no free lunches in money and investing, remember? And we'll be talking a bit more about that as well shortly. For our VIP Investment Club members, today's video will be the starting point for our member series on covered call strategies over the next few months. Because Marcus and I think it's important for everyone to have the foundational pieces and understand the risk profile first before we dive deeper into analyzing covered call ETFs and how you might be able to implement a covered call strategy on your own. So, with that in mind, here are the three topics I'll be covering today. One, what is a call option and how does it work? Two, why might an investor trade call options? And three, what's our personal perspective on covered call strategies? Also, on a separate note, as we've gotten lots of messages on the topic, if you're interested in our May Ibond rate projection and this month's five-year tips auction, that video will be out next weekend, April 18th or 19th. So stay tuned for that. This should give everyone who is interested enough time to contemplate their I bonds in April versus May decision. For today, let's dive in now, folks, and talk a bit more about covered call strategies. What is a call option and how does it work? Many in our Diamond Neste community will already be familiar with what a call option is in principle. It is a contract between two parties where one side charges a certain price up front to give the other side the right, but not the obligation to buy a financial asset at a predefined price during a certain time in the future. So, for example, if you pay me$5 today, I promise to sell you a share of NVIDIA for the fixed price of$200 by the end of the year at your discretion. Please keep in mind that the numbers I just used, like all the numbers in today's video, are for illustration purposes only and not intended to reflect actual market prices that will come in later videos. The concept of a call option may be easy enough to understand, but like many other professions, options traders use certain terms or lingo that can be confusing at first. So let's walk through some foundational options terminology. The person who collects or receives the upfront fee is usually called the seller or writer of the option, as he or she collects the fee and writes or issues the option. Sometimes the seller is also called the short, as he or she now has the obligation to deliver the asset if asked, and is in this sense in a short position. The person who pays the upfront fee is usually called the buyer or holder of the option, or sometimes also the long, as he or she now has a right to get the asset delivered at a certain price, which puts him or her potentially in the long position of an asset owner. Options can have many underlying assets, but most often they're about stocks. The price at which the seller promises to deliver the asset, for example, the underlying share in the future, is usually called the strike price or exercise price, the price at which the buyer of the option can strike and exercise his or her rights, so to speak. The upfront fee paid by the buyer to the seller is also called the premium. It is usually quoted in dollars per share. Listed options, the type that's most common, are traded on an exchange and standardized. One of these listed options, often simply called one contract, usually controls or applies to 100 shares. This is done to avoid trading very small amounts. So for example, if the premium per share is$2.50 and you buy one standard options contract for 100 shares, your effective price will be$250 for the one options contract.$2.50 per share times 100 shares. The last day on which the option can be exercised is called the expiration date. Most options are American style, meaning that they can be exercised at your discretion at any time before they expire. However, there are also some European style options that can only be exercised on the expiration date proper, not beforehand, like an American-style option. And finally, one set of terminology that is often most confusing for options beginners: in the money, out of the money, and at the money options. An option or options contract is said to be in the money from the buyer's perspective when the current price of the underlying asset, for example, the stock, is higher than the strike price. For example, if NVIDIA is trading at$250 right now, but the option gives you the right to buy it at a strike price of$200, the option is said to be in the money. It has an intrinsic monetary value, as you would make an immediate gain of$50 if you were to exercise it right now. On the other hand, an option or options contract is said to be out of the money from the buyer's perspective when the current price of the underlying asset is lower than the strike price. For example, if NVIDIA is trading at$150 right now, but the option gives you the right to buy it at a strike price of$200, the option is said to be out of the money. It has no intrinsic monetary value, as you would not gain anything, but even lose$50 if you were to exercise it right now. And an option or options contract is said to be at the money when the current price of the underlying asset is roughly the same as the strike price. So, for example, if NVIDIA is trading at$200 right now and the option gives you the right to buy it at a strike price of$200, the option is said to be at the money. In this case, you would not make either a gain or a loss if you were to exercise the option right now. For VIP investment club members who are interested in diving deeper into covered call strategies, make sure you understand these foundational terms and what we will be covering in the next section of today's discussion, as these pieces will form the basis of our upcoming member videos on covered calls and help you better understand how you may want to go about implementing this in your own personal portfolio if you wish to do so. And if you're not a VIP Investment Club member yet and want to join the daily member conversations on money, investing, and retirement, whether that may be about covered calls, preferred stock, or treasuries, and other types of bonds, etc. etc., visit our website at www.diamondsic.com and click on this yellow private VIP Investment Club button to learn more and sign up today. So now that you know what a call option is and how it works, let's move on to the next part of today's discussion. Why might an investor trade call options? So let's start with the buyer of the call option, the person who will pay you the premium if you sell the call option. Investors would normally buy a call option if they think that a certain stock will go up in price and want some leverage. Remember, buying one call option gives the buyer the right to buy 100 shares, and it's typically much cheaper than paying in full for 100 shares while still giving the buyer the same upside. Even better, buying a call option can limit the risks of the buyer at the same time. If he or she buys 100 shares directly and the share price then collapses unexpectedly, the investor would be settled with large capital losses. However, if the investor buys a call option, the worst case is that the initial premium is loss. But that's it. Even if the company in question were to go suddenly bankrupt. In other words, the buyer of a call option has potentially unlimited upside from gains in the underlying stock, but a limited downside risk in the form of a loss premium. Now, let's look at the seller of a call option, the position that you as an investor would take when we speak about covered call strategies. It's a bit more complicated, and it all depends on whether the seller already owns the shares that underlie the option. The good news first: if an investor already owns the shares that may have to be delivered, if the seller is covered, as the industry says, the risk profile can look quite attractive, as I said at the very beginning of this video. Now, the upside remains limited in that the best case for the seller is if he or she collects the initial premium and the option never gets exercised. But even if the option gets exercised, there's no real downside risk, no risk of having a direct loss. Even in the worst case, the seller of a covered call simply delivers his or her shares at the predefined exercise price and usually even nets a small profit. The real risk of a covered call for the seller of the option is the capped upside, the fact that the seller is giving up some or even most of the upside of a stock that goes up in price. We'll walk through an example in detail soon. It would be different for a naked call option, meaning if the seller doesn't already own the underlying stock, the upside remains limited to the option's premium. But the downside is potentially unlimited if the option gets exercised. Remember, if the option gets exercised, the seller needs to deliver the underlying stock at the predefined price, even if the market has gone up in the meantime. And because the naked seller of a call option doesn't own the stock yet by definition, he or she now needs to go out and buy it at whatever price the market is charging, leading to potentially unlimited losses. So selling naked call options is basically not a good idea for most retail investors in our mind, while selling covered call options may sometimes make sense. So let's focus on covered calls for the purposes of this video and walk through an example of how it may work. Let's say that you own a stock whose market price is$10 right now, and we take these$10 as your cost base for this example. You sell a call option to a buyer with a strike or exercise price of$12. Again, this strike or exercise price means that the buyer of the call option has the right to buy your stock from you at$12 before the option expires. The buyer of the call option pays you a call premium of$50 for the call option. So you've made$0.50 from selling this call option so far. And you can always keep these$0.50 regardless of whether the option gets exercised at some point or not. Now, let's go through four different ways this can play out. This column shows whether your stock goes above the call options strike price of$12 before the option expires. This column shows whether the buyer exercises the call option. In the first three scenarios, the buyer would not exercise the call option because your stock does not go above the call options strike price of$12. Again, why would the buyer buy the stock from you at a strike price of$12 when they could buy it on the open market for less? Meaning that in all of these three scenarios, you would keep your underlying stock. Plus, you also earn 50 cents from this call premium on top. But let's go a bit into detail on how your profit and loss as a seller of this option would work. So this column shows the price of your stock when the call option expires. And this column shows your total loss or gain from the change in stock price, plus the sale of the call option. If your stock is at$9 when the call option expires, you would have made a total loss of 50 cents. That's a loss of$1 because the stock price went down from$10 here when you first sold the call option to$9 here when the option expires. But this loss is partially compensated by a gain of$0.50 from the sale of the call option. Here, if your stock is at$10 when the option expires, you would have made a total gain of$0.50. There's no loss or gain from the change in stock price because, well, it hasn't changed. It's still$10 here, as it was in the beginning here when you first sold the call option. But you made a gain of$0.50 from the sale of the call option here. If your stock is at$11 when the option expires, you would have made a total gain of$1.50. That's a gain of$1 because the stock price went up from$10 here when you first sold the call option to$11 when the option expires. Plus, you made a gain of$0.50 from the sale of the call option here. The next scenario is different. Here the stock trades at$13 in the market, which is higher than the call option strike price of$12. In this case, the buyer would almost certainly exercise the call option because they can buy the stock for cheaper from you than from the open market. But even though the call option gets exercised and you have to give up your share in this scenario, you still make a total profit of$2.50. That's a gain of$2 from the stock sale. That's a strike price of$12 that the buyer of the call option pays for the stock minus the$10 stock price from when you first sold the call option. Plus, like in all the other scenarios, you still can book a gain of$0.50 from the initial sale of the call option here. Now, let's put your gain or loss as the seller of a covered call into perspective and compare it to what you would have made if you had just let the shares sit in your portfolio and did not sell the covered call on top. Well, without selling the option, you would not have earned a call premium of 50 cents from the sale of the call option, and your total gain or loss would simply be the price of your stock here at the end of the period in question minus the original stock price here of$10. Meaning that in scenario one, you would have a total loss of$1. That's this$9 minus this original stock price here of$10. In scenario two, you would have no loss or gain because your stock price has stayed the same. In scenario three, you would have a total gain of one dollar. That's this$11 here minus this original stock price here of$10. And in scenario 4, you would have a total gain of$3. That's this$13 here minus the original stock price here of$10. So if we compare the first three scenarios where the price of your stock is below the call option strike price when the call option expires, you end up making more money, or at least losing a little bit less by selling the call option and collecting this additional 50 cents from the call premium. And even better, for income-seeking investors, the options premium comes in cash that is freely available. So far, so good. It's no wonder that these covered call ETFs are popular with many investors and retirees, right? But let's talk about what it means that you give up some or even most of the upside of your equities when you sell a covered call. In scenario 4, in the last row, as we discussed before, your stock trades above the call option strike price, and the buyer exercises his or her right. Exactly the scenario where you may end up making less money. Without selling the option, you would have made a profit of$3 per share from the price increase from$10 to$13. However, with the call option, you made only$2.50,$2 from the sale to the option holder at the strike price of$12, plus$50 from the options premium, as I've shown before. That's the capped upside that covered calls impose on the seller of the option. If the option gets exercised, you will only ever get the strike price plus the initial options premium, the$2.50 in our example. Now, some investors might gladly limit their upside if they can get additional income and a bit of downside protection. And that's not unreasonable at all. After all, even in scenario 4, you still made a net profit of$2.50, even if it's a bit less than if you hadn't sold the option. But what if the underlying stock would have been a budding tech star, shooting not to$13 like in our example, but to$40 or even$100, you would have booked a gain of$30 or even$90, respectively, if you hadn't written the option versus only$2.50 with the option. So suddenly you have given up a lot of potential gains. Now, such a case will admittedly probably be rare, but missing the full upside of a strong bull market and or the rock star performance of a growth stock is the real downside, the real risk when you're writing covered call options. This may be less of a concern in a flat or falling market, but in a rising market, limiting your upside may significantly impact your overall total return over time. For VIP members, we will get a better feeling for this effect when we look at the track record of covered call ETFs in our next video. For today though, let's move on to the next part of this discussion. What's our personal perspective on covered call strategies? So, personally, we think that covered call strategies may be something to consider for investors who want to keep exposure to the stock market while enhancing their income with limited risk for all the reasons that we mentioned towards the beginning of this video. Covered call strategies can potentially generate additional income from an equity portfolio. Covered call strategies have a very conservative risk profile, meaning they will never generate any direct losses in your portfolio. And they're easily accessible either via ETFs or by selling covered calls on your stocks yourself. That said, we do think you should check all of these boxes before proceeding with covered call strategies. You understand the risk profile of covered calls and can accept it. As we always say, don't invest in anything that keeps you up at night. You like the fact that even in the worst case, you cannot suffer any direct losses. From writing the covered call option. Plus, you even get limited downside protection from the extra premium income. You can live with the fact that you trade away some or even most of the upside of your stocks, which may prove particularly painful in a strong bull market. You can accept that you partially lose control of your equity portfolio. In principle, shares can be called away at any point in time at the sole discretion of the buyer of the call option. For example, this may trigger capital gains taxes that you were not expecting. You can manage the operational complexities of a covered call strategy, including the tax rules if executed in a normal taxable brokerage account. For example, your premium income may be taxed either in isolation or together with the underlying asset at either short or long-term capital gains rates, depending on the circumstances and whether the option is exercised or not. On the other hand, covered call strategies may not be for you if one you're a growth investor and want the full upside of the market. Missing out on bull markets and potential rock star single stock growth is the main drawback of a covered call strategy for all practical purposes. Two, you're just not an equities investor because you value certainty and predictability above anything else andor want meaningful downside protection on your equity portfolio. Remember, the income from a covered call strategy is not guaranteed in any shape or form and may fluctuate considerably over time. In addition, a covered call strategy requires a sizable equities exposure. And while the premium income from the options can mitigate share price declines, you remain exposed to all market downturns at the end of the day. And three, you don't like the extra time, money, and ensuing operational risk that a covered call strategy requires. Plus, holding these equities ties up your portfolio and capital. Stocks generally should be fully paid and can't be traded while they serve as a cover for a call option. So, what do you think about covered call strategies? Are you already using them either via an ETF or by writing options yourself? Or are you interested but haven't made up your mind yet? Drop a comment below and let us know. And if you're a VIP Investment Club member, stay tuned for our next member video on covered call ETFs and more. And if you're not a VIP Investment Club member yet and want to join our daily conversations on the best rates and investment opportunities out there for safety-oriented investors looking for higher yields, visit our website at www.diamondestic.com and click on this yellow private VIP Investment Club button to learn more and sign up today. Alright, Diamond Estec members, Super Savers, and Course fans, I hope you enjoyed today's video and learned something new. And see again very soon with more brand new wealth building content for your financial journey.