View from the Observation Deck

Total assets invested in covered call strategies have grown rapidly over the past several years. Data from Morningstar Direct reveals that net assets in the “derivative income” category of ETFs increased by $33 billion in 2024 to a total of $97 billion for the calendar year. In a signal of continued interest, investors funneled a record $7.5 billion into the asset class in July 2025 alone.

Covered call strategies tend to be most beneficial when the stock market posts negative returns, or when returns range from 0%-10%.

The S&P 500 Index posted a negative total return just three times in the table above. The CBOE BuyWrite Index outperformed the S&P 500 Index in two of those three years (missing the third year by 0.39 percentage points in 2018). For comparison, there are four years in the table where the S&P 500 Index posted returns between 0% and 10%. The CBOE BuyWrite Index outperformed the S&P 500 Index in three of the four years (missing the fourth year by 0.66 percentage points in 2005).

Covered call options can generate an attractive income stream and serve as a hedge against negative price movement, but they may limit the potential for capital appreciation.

There were 13 years in today’s table where the S&P 500 Index notched total returns of 10% or more (not including the current year). The CBOE BuyWrite Index underperformed the S&P 500 Index in every one of them, including last year when the S&P 500 Index increased by 25.00%, while the BuyWrite Index increased by 20.12%.

Takeaway: Covered call strategies may serve as a unique alternative to the S&P 500 Index. That said, while the income they provide has generally led to outperformance during negative or moderately positive periods, returns are often capped during times where the market is performing exceedingly well. As a recent example, the S&P 500 Index surged by 25.00% in 2024, outperforming the CBOE BuyWrite Index by 4.88 percentage points. When we last posted on this topic, the tables were turned, with the CBOE BuyWrite Index outperforming the S&P 500 Index by 0.56 percentage points on a total return basis (thru 3/5/25). As revealed in today’s table, the S&P 500 Index surged since then and is now up 11.73% YTD thru 9/9 compared to an increase of 1.15% for the CBOE BuyWrite Index over the same period (total returns). Even so, investors continue to allocate record amounts of capital to derivative income instruments. Will heightened volatility from tariffs, geopolitical strife, and deteriorating economic data prompt investors to continue purchasing these strategies? We will report back as updates require.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The CBOE S&P 500 BuyWrite Index (BXM) is designed to track a hypothetical buy-write strategy on the S&P 500. It is a passive total return index based on (1) buying an S&P 500 stock index portfolio, and (2) "writing" (or selling) the near-term S&P 500 Index (SPXSM) "covered" call option.

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