Selling Covered Calls on VOO and SPY to Generate Monthly Income: What You Need to Know

The Short Answer: Yes, But There Is a Catch With VOO

Yes, you can sell covered calls on SPY and VOO to generate monthly income from your portfolio. Both are S&P 500 index ETFs, but only SPY has a deep, liquid options market that makes covered-call writing practical for most retail investors. VOO does have listed options, but the bid-ask spreads are wider and open interest is far lower than SPY, which means you will often leave money on the table when you enter or exit a position.

The core mechanic is simple: you own at least 100 shares of the ETF, you sell one call contract per 100 shares, you collect the premium upfront, and you keep that cash whether the trade goes your way or not. The tradeoff is that you cap your upside if the ETF rallies hard past your strike price.

Why SPY Is the Better Tool for This Strategy

SPY is one of the most actively traded options contracts in the world. According to the CBOE, SPY options routinely account for tens of millions of contracts in daily volume. That liquidity matters because tight bid-ask spreads mean you get closer to the theoretical fair value of the option when you sell.

VOO tracks the same index and has a lower expense ratio, which is why long-term buy-and-hold investors often prefer it. But for covered-call writers, the options market on VOO is thin by comparison. A wide spread on VOO might cost you $0.10 to $0.20 per share in slippage on every trade. On a 100-share lot that is $10 to $20 lost before you even start. Over 12 months of monthly trades, that drag adds up.

If you already hold VOO and do not want to sell it to buy SPY, you have two practical choices: write calls on VOO and accept the wider spreads, or hold VOO for the long-term exposure and use a separate SPY position for your covered-call writing. Many traders do exactly that.

A Worked Example: Selling a Monthly SPY Covered Call

Let's walk through a real-numbers example. Assume SPY is trading at $530 per share. You own 100 shares, so your position is worth $53,000.

You decide to sell one SPY call with a strike price of $540 expiring in roughly 30 days. A $540 strike is about 1.9% out of the money. At current implied volatility levels, that call might fetch a premium of around $3.50 per share, or $350 for the contract (one contract covers 100 shares).

Here is how the three outcomes play out at expiration:

1. SPY closes below $540. The call expires worthless. You keep the full $350 premium. Your shares are untouched. Annualized, twelve of these trades would generate roughly $4,200 in premium income on a $53,000 position — about a 7.9% yield on top of SPY's dividend.

2. SPY closes above $540. Your shares get called away at $540. You still keep the $350 premium, and you sell your shares at $540 instead of the higher market price. You miss the gains above $540. If SPY ran to $555, you left $1,500 of upside on the table.

3. SPY closes right at $540. The outcome is similar to scenario one or two depending on whether the buyer exercises. You still keep the premium either way.

The $350 premium is yours the moment you sell the contract. That is the income part. The risk is the capped upside, not the downside — your shares can still fall in value just as they would if you held them without writing calls.

What Are the Real Risks Here?

Covered calls are one of the more conservative options strategies, and FINRA classifies them as a Level 1 options strategy at most brokers. But conservative does not mean risk-free. Here are the risks you need to understand before you start.

Downside risk is not reduced. If SPY drops from $530 to $480, you lose $5,000 on your shares. The $350 premium you collected softens the blow slightly, but it does not protect you from a serious market decline. Covered calls are an income tool, not a hedge.

You cap your upside. In a strong bull market, selling covered calls means you will underperform a simple buy-and-hold investor. If SPY gains 20% in a year and your calls get exercised every month at strikes 2% out of the money, you will capture far less than that 20%.

Early assignment is possible but rare on ETFs. American-style options like SPY calls can be exercised before expiration. This is uncommon on non-dividend-paying calls, but it can happen. The Options Industry Council (OIC) has detailed educational material on early assignment risk that is worth reading before you start.

Rolling costs money. If SPY rallies toward your strike and you want to avoid assignment, you can buy back your short call and sell a new one at a higher strike or later date. That roll costs you the bid-ask spread twice and may result in a net debit if you are rolling up in strike.

Tax Treatment: What the IRS and CRA Say

Tax treatment of covered calls is one of the most overlooked parts of this strategy for retail investors.

In the United States, the IRS treats premiums from covered calls as short-term capital gains in most cases, regardless of how long you have held the underlying shares. There is an important exception: if your covered call is considered a 'qualified covered call' under IRS rules, the holding period on your shares continues to run. If your call is not qualified — for example, if it is deep in the money — the IRS may suspend your holding period on the shares, which could affect whether your eventual gain on the shares is taxed at the lower long-term rate. IRS Publication 550 covers this in detail.

For Canadian investors, the CRA treats covered-call premiums as either capital gains or business income depending on the frequency of trading and your intent. Investors who write calls occasionally on long-held positions are generally treated as capital gains. Traders who write calls frequently as a primary income activity may be assessed as business income, which is fully taxable. The CRA's Interpretation Bulletin IT-479R addresses securities transactions and is the relevant guidance.

In both countries, if your shares are held in a tax-advantaged account — a Roth IRA or 401(k) in the US, or a TFSA or RRSP in Canada — the premium income may be sheltered from current taxation. Check with a qualified tax professional for your specific situation, as the rules depend on your account type, holding period, and trading frequency.

How to Choose Your Strike and Expiration

The two decisions that drive your income and your risk are strike price and expiration date.

Strike price: A strike closer to the current price (closer to at-the-money) pays more premium but increases the chance your shares get called away. A strike further out of the money pays less but gives your shares more room to run. Many covered-call writers on SPY target a delta of 0.20 to 0.30 on the short call, which roughly corresponds to a 20% to 30% probability that the call finishes in the money at expiration. That is a starting point, not a rule.

Expiration: Monthly expirations (roughly 30 days out) are the most popular for income writers because theta decay — the erosion of an option's time value — accelerates in the final 30 days. Weekly options on SPY pay less premium per trade but give you more flexibility to adjust. Some traders sell weeklies and roll them every Friday. Others prefer the simplicity of one trade per month.

A practical starting approach: sell a 30-day call at a strike that is 2% to 5% out of the money. Collect the premium. Let it expire or buy it back when it has lost 50% to 80% of its value, then sell the next one. This is sometimes called the 'wheel' or a simple monthly income rotation, and it keeps transaction costs manageable.

Is This Strategy Right for Your Portfolio?

Selling covered calls on SPY works best when you already plan to hold the ETF for the long term and you are comfortable giving up some upside in exchange for steady premium income. It is not a fit for every investor.

If you are in the accumulation phase and you believe the market will deliver strong returns over the next decade, capping your upside every month could meaningfully reduce your total return compared to simply holding SPY. Research from the CBOE on the BXM Index — which tracks a buy-write strategy on the S&P 500 — shows that covered-call strategies on the index have historically produced similar or slightly lower total returns than the index itself, with lower volatility. The income is real, but it comes at the cost of some long-term growth.

If you are in or near retirement, or you simply want your portfolio to generate more cash flow on a regular basis, covered calls on SPY are one of the most straightforward ways to do that with a position you already own. The strategy is transparent, the market is liquid, and the mechanics are well-documented by the OIC and CBOE for investors who want to go deeper.

Start with one contract on 100 shares. Track your premium income, your assignment events, and your tax outcomes for a full year before scaling up. That hands-on experience is worth more than any backtested return chart.

Can I sell covered calls on VOO the same way I do on SPY?

Yes, VOO has listed options and you can sell covered calls on it if you own at least 100 shares. The practical problem is that VOO options have much lower volume and wider bid-ask spreads than SPY, which means you will likely get worse fills and earn less net premium. Most active covered-call writers prefer SPY for this reason.

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

It depends on implied volatility and how close to the money you sell. In a typical volatility environment, selling a 30-day call about 2% out of the money on SPY might generate roughly $300 to $500 per contract per month on a position worth around $53,000. That works out to roughly 6% to 11% annualized premium yield, though actual results vary with market conditions.

What happens to my SPY shares if the call gets exercised?

If SPY closes above your strike price at expiration and the call is exercised, your 100 shares are sold at the strike price. You keep the premium you collected when you sold the call, and you receive the strike price for your shares. You will need to decide whether to repurchase shares to continue the strategy.

Are covered call premiums on SPY taxed as ordinary income or capital gains?

In the US, the IRS generally treats covered-call premiums as short-term capital gains. If the call does not qualify as a 'qualified covered call' under IRS rules, it can also suspend the holding period on your underlying shares, which matters for long-term capital gains treatment. IRS Publication 550 covers the details, and a tax professional can clarify your specific situation.

Can I sell covered calls on SPY inside my IRA or Roth IRA?

Most brokers allow covered calls in IRAs and Roth IRAs because the strategy is classified as a Level 1 options strategy by FINRA and does not involve margin or naked short positions. Premiums earned inside a Roth IRA grow tax-free, which makes it an attractive account for this strategy. Check your broker's specific IRA options approval requirements before trading.

What is the difference between selling covered calls on SPY versus buying an ETF that already does it for you like XYLD?

ETFs like XYLD run a systematic covered-call overlay on the S&P 500 and distribute the premium as monthly income, so you get the strategy without managing it yourself. The tradeoff is that you pay an expense ratio, you have no control over strike selection or timing, and the tax treatment of distributions may differ from writing your own calls. Doing it yourself on SPY gives you more control and potentially lower costs if you trade efficiently.