Covered Calls on VOO or SPY for Retirement Income: What You Need to Know Before You Sell

The Short Answer: Yes, But SPY Works Better Than VOO for This Strategy

You can sell covered calls on either VOO or SPY to pull income from your portfolio without selling shares. SPY is the stronger choice for most retail traders because it has deeper options liquidity, tighter bid-ask spreads, and a much larger open interest than VOO. VOO options exist and are tradeable, but the spreads are wider, which quietly eats into the income you think you are collecting.

The core idea is simple: you already own 100 shares of SPY or VOO, you sell one call contract against those shares, and you collect the premium upfront. If the ETF stays below your strike at expiration, the option expires worthless and you keep the premium as income. If it rises above your strike, your shares get called away at the strike price — that is the main risk you need to plan for.

Why Liquidity Is the First Thing to Check

Liquidity determines how much of your premium you actually keep. When you sell a covered call, you get the bid price. The market maker gets the spread. On SPY, the bid-ask spread on a near-the-money call is often $0.01 to $0.03 wide. On VOO, that same spread can be $0.20 to $0.50 wide on a contract worth $1.50 to $3.00. That spread is a direct cost to you.

The Options Industry Council (OIC) teaches that open interest and daily volume are the two fastest ways to gauge options liquidity. SPY routinely shows millions of contracts in open interest across its chain. VOO open interest on any single strike is often in the hundreds or low thousands. More open interest means tighter spreads and easier fills when you want to close or roll a position before expiration.

Bottom line: if you are selling covered calls for steady retirement income, you want to be able to enter and exit cleanly. SPY gives you that. VOO is workable but less efficient.

A Real Worked Example: Selling a Covered Call on SPY

Let's say SPY is trading at $530. You own 100 shares. You decide to sell one covered call at the $540 strike expiring in 30 days. The bid on that call is $3.20, so you collect $320 in premium (100 shares × $3.20), minus your broker's commission.

Scenario A — SPY closes at $535 at expiration. The call expires worthless. You keep all $320. Your shares are untouched. Annualized, if you repeat this every month, that is roughly $3,840 per year on a $53,000 position, or about 7.2% in premium income before taxes. That does not include SPY's dividend yield of roughly 1.2% to 1.3%, which you still collect as the shareholder.

Scenario B — SPY rallies to $548 at expiration. Your shares are called away at $540. You receive $54,000 for your 100 shares plus you keep the $320 premium. You made money on the trade, but you no longer own the shares. In retirement, that means you now have cash instead of your ETF position, and you have to decide whether to buy back in — potentially at a higher price.

Scenario C — SPY drops to $510. The call expires worthless and you keep the $320 premium. But your shares are now worth $5,000 less than when you sold the call. The $320 softens the loss but does not come close to covering it. This is why covered calls reduce upside but do not meaningfully protect the downside.

The Real Risks — Not Buried, Not Softened

FINRA classifies covered calls as a Level 1 options strategy, meaning they are approved for most brokerage accounts. That approval level can make them feel safer than they are. Here are the risks that matter most for retirees.

Capped upside in a bull market. If SPY runs 15% in a year and your calls keep getting assigned at strikes 2% above your cost, you miss most of that gain. Over a long retirement, underperforming a simple buy-and-hold strategy by 3% to 5% per year compounds into a significant shortfall.

Assignment risk and forced selling. When your call goes in-the-money and you get assigned, you lose your shares. In a taxable account, that triggers a capital gains event. In a retirement account like an IRA or Canadian RRSP, assignment is less of a tax problem immediately, but you still have to rebuild your position.

Premium income is not guaranteed. Implied volatility drives premium levels. When the VIX is low, SPY call premiums shrink. A 30-day $540 call that pays $3.20 when the VIX is at 18 might only pay $1.60 when the VIX is at 12. Your income stream is variable, not fixed like a bond coupon.

Psychological risk. Watching SPY rally past your strike while your gains are capped is harder than it sounds. Many retirees abandon the strategy at exactly the wrong time — right after a big missed gain — and lock in the worst of both worlds.

Tax Rules That Directly Affect Your Retirement Income

For US investors, the IRS treats covered call premiums as short-term capital gains in most cases, regardless of how long you have held the underlying shares. The IRS also has holding period rules that can disqualify your ETF shares from long-term capital gains treatment if your call is too deep in-the-money. Specifically, IRS rules under Section 1092 on straddles and the qualified covered call rules mean that if you sell a call that is not a 'qualified covered call,' the holding period on your shares is suspended while the call is open. The OIC publishes a detailed breakdown of qualified covered call requirements that is worth reading before you start.

For Canadian investors, the CRA treats premiums received from selling covered calls as either capital gains or business income depending on your trading frequency and intent. If the CRA determines you are trading options as a business, premiums are fully taxable as income rather than at the 50% capital gains inclusion rate. Retirees who sell calls occasionally on long-held ETF positions are generally treated as investors, not traders, but the line is not always clear. Consult a tax professional familiar with CRA options guidance.

In a tax-sheltered account — a US IRA or Canadian RRSP/TFSA — premiums grow tax-deferred or tax-free, which makes the math significantly better. Many retirement-focused covered call traders run this strategy inside their IRA or RRSP specifically to avoid the annual tax drag on premium income.

VOO vs. SPY: A Side-by-Side Comparison for Covered Call Sellers

Both ETFs track the S&P 500, so the underlying exposure is nearly identical. The differences that matter for covered call sellers come down to structure, price, and options market depth.

SPY is structured as a unit investment trust and has a share price around $520 to $540, meaning one contract controls about $53,000 in notional value. VOO is structured as a traditional open-end fund and trades around $480 to $490, so one contract is slightly less notional exposure. Neither difference is large enough to matter much.

What does matter: SPY's options market is one of the most liquid in the world. The SEC has noted SPY as among the highest-volume listed options products in the US market. VOO options were only introduced more recently and have not built the same depth. If you are selling one or two contracts a month as a retiree, VOO is usable but you will pay more in spread costs and occasionally struggle to get a clean fill at your target price.

One practical note: if you already own VOO and do not want to sell it to buy SPY (triggering a taxable event), it is perfectly reasonable to sell covered calls on VOO directly. Just use limit orders, be patient with your fills, and check the bid-ask spread before you enter.

How to Size This Strategy for a Retirement Portfolio

Most retirement-focused covered call traders do not sell calls on 100% of their ETF shares. A common approach is to sell calls on 25% to 50% of your position. This way, if SPY rallies sharply and your calls get assigned, you still hold the majority of your shares and participate in the upside.

For example, if you own 400 shares of SPY, you might sell two contracts (covering 200 shares) each month and leave the other 200 shares uncovered. You collect roughly half the maximum premium income, but you keep full upside exposure on half your position. This is a direct trade-off between income now and growth potential later.

The right percentage depends on your income needs, your tax situation, and how much you care about keeping pace with a rising market. There is no universal answer, but starting conservatively — selling calls on 25% of your position — lets you learn how assignment and rolling work before you commit more of your shares to the strategy.

Can I sell covered calls on VOO in my IRA or Roth IRA?

Yes. Most major brokers allow covered calls in IRAs at their standard Level 1 options approval. Because premiums in a traditional IRA grow tax-deferred and in a Roth IRA grow tax-free, you avoid the annual tax drag that comes with selling calls in a taxable account. Check your broker's IRA options agreement, as a small number of custodians still restrict options trading in retirement accounts.

How much monthly income can I realistically expect from selling covered calls on SPY?

At typical implied volatility levels, a 30-day out-of-the-money call on SPY with a delta around 0.20 to 0.25 might generate $2.50 to $4.00 per share in premium, or $250 to $400 per contract. That works out to roughly 0.5% to 0.8% of notional value per month, or 6% to 9% annualized — but this number shrinks when volatility is low and grows when volatility spikes. It is variable income, not a fixed payment.

What happens to my covered call if SPY pays a dividend before expiration?

SPY pays quarterly dividends, and ex-dividend dates can increase the risk of early assignment on in-the-money calls. If your call is in-the-money heading into the ex-dividend date, the buyer of your call may exercise early to capture the dividend, which means your shares get called away before expiration. The OIC covers early assignment risk in detail in its options education materials, and it is worth reviewing before you sell calls that span an ex-dividend date.

Should I sell weekly or monthly covered calls on SPY for retirement income?

Monthly calls (around 30 days to expiration) are generally better for retirement income sellers because they offer a better balance of premium collected versus the number of transactions you have to manage. Weekly calls collect less premium per trade and require you to make four times as many decisions each month, which increases the chance of a mistake. Start with monthlies until you are comfortable with the mechanics.

Does selling covered calls on VOO or SPY count as a wash sale?

The wash-sale rule under IRS Section 1091 applies when you sell a security at a loss and buy a substantially identical one within 30 days. Selling a covered call itself does not trigger a wash sale, but if your shares are called away at a loss and you immediately buy back into the same ETF, the wash-sale rule could disallow that loss. The IRS has not issued comprehensive guidance specifically on options and wash sales, so consult a tax professional if you are selling calls on a position that is currently underwater.

Is selling covered calls on SPY better than just buying a covered-call ETF like XYLD?

Selling your own calls gives you control over strike selection, timing, and how aggressively you cap your upside — XYLD and similar funds sell at-the-money calls systematically, which caps gains more tightly than most individual traders would choose. DIY covered calls also avoid the fund's management fee, which for XYLD runs around 0.60% annually. The trade-off is that managing your own calls takes time and requires options approval at your broker.