An Alternative to Covered Calls on SPY – Pay Someone Else To Do It

So since I found out about generating options income I’ve been busy studying and I realised it’s going to take a long time, and I’m a very cautious person. If I dip my toe in with the safest strategies and micro amounts it’s going to be years before I make any significant income.

Then I heard about SPYI, an investment where, essentially, someone else will do what I was planning to do, i.e. buy the SPY index, write calls on it and generate income. I was hoping for 10% per annum roughly and of course, I’ll need $55,000 to get started. But with SPY, they buy the underlying index for me, write the calls, give me the income – and all for 0.7%. What’s not to like?

While SPYI offers an average return of around 11% per year, its strategy is built on generating income rather than seeking growth. This is where SPYI stands apart. By holding the underlying stocks in the S&P 500 and using a covered call strategy to generate income, SPYI delivers a higher income yield at the cost of capped upside potential. I believe that, for my portfolio, this shift towards SPYI will provide a more reliable and predictable income stream over time.

The SPYI Strategy: Income and Stability with Covered Calls

SPYI is unique because it combines both income and stability through its covered call strategy. The fund holds the underlying stocks of the S&P 500 Index, a diverse group of large, well-established companies. In addition to this, SPYI sells call options on these stocks to generate income.

While this strategy provides a steady income stream from the premiums collected from the call options, it also means that the upside potential is capped. If the price of the underlying stocks rises significantly, the options are likely to be exercised, meaning the stocks are sold at the strike price, thus limiting the returns on any gains. Essentially, SPYI prioritises income over growth potential, and for my goals, this is exactly what I’m looking for.

YieldMax: Higher Yield, Higher Risk

Another option I’ve looked into in the income space is YieldMax ETFs, which can offer much higher yields than SPYI, often reaching yields upwards of 20% or more. These funds use a similar options strategy to SPYI, selling call options on large-cap stocks to generate income. However, YieldMax comes with greater risks.

The primary risk with YieldMax is asset erosion. These funds don’t hold the underlying assets; instead, they focus entirely on options trading. This means that if the options strategy doesn’t pay off as expected, the value of the assets can decrease over time. Additionally, some YieldMax funds have exposure to cryptocurrencies like bitcoin, which can introduce even more volatility into the investment. While the yields are attractive, I’m more comfortable with SPYI, as it holds the underlying assets and therefore offers more stability and less risk of erosion.

Why I’m Allocating More to SPYI

Over time, I’ve decided to allocate more of my portfolio to SPYI, even though its income yield is lower than that of YieldMax. While YieldMax might offer a higher income yield, the associated risks—especially with asset erosion and exposure to volatile assets like bitcoin—make it less appealing to me. I prefer the stability and predictable income that SPYI provides through its covered call strategy, especially since it holds the underlying S&P 500 stocks.

There are two other considerations. One is that, as a non-US person, I hold some US investments and any dividends have a withholding tax, whereas SPYI is considered income, and so it is tax-free (the income) in this sense. The other thing is that in my own tax domicile, the income threshold is much higher than the capital gains. Many of my investments are not in a tax-advantaged account and so an investment that maximises income while capping upside is ideal.

And at the end of the day, the total return of many things like REITs aims for ten percent but is lucky to get eight in my experience, and many of these investments are well down from their purchase price (in my own portfolio). Eleven percent with a very slow rise in asset price over time seems like a no-brainer for me personally as I’ll be near doubling my income. Yes, not without risk and these are new investment types so who knows what happens in a downturn, but on the balance of things, I will be increasing my position in this, and similar, going forward.