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How do ETF covered calls work?

The fund takes care of the covered calls for them. The ETF covered call strategy usually involves writing short-term (under two-month expiry) calls that are out-of-the-money (OTM), meaning the security’s price is below a call option’s strike price. Using shorter-term options allows investors to take advantage of rapid time decay.

Are covered call ETFs a good investment?

Income investors looking for a steady stream of dividend payments may want to consider covered call ETFs. These funds offer the potential for income generation through the sale of call options on underlying holdings.

Are covered call ETF dividends qualified?

No, dividends from covered call ETFs are not qualified. They may be classified as return of capital (ROC) or ordinary income, depending on the year. How are covered call ETF dividends taxed? Dividends from covered call ETFs may be classified – and thus taxed – as return of capital (ROC) or ordinary income, depending on the year.

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