Rethinking How Income Is Generated from Equities
Income strategies in equities often rely on selling options to generate cash flow, with covered calls as one widely used approach. However, that approach can involve a tradeoff. Selling call options can limit participation if markets move higher.
xETFs’ Daily Income ETFs are designed differently. Instead of applying options across an entire portfolio, they use options more selectively, with the intent of generating option premium while keeping a larger portion of the underlying stock exposure.
The goal isn’t to maximize yield at all costs, but to seek income while remaining exposed to the underlying stock.
The strategy is designed to maintain exposure to a single stock (for example, NVIDIA or Tesla) while writing call options on just a portion of that exposure. The strategy may sell call options on up to 25% of the equity position but will initially target selling only 10%.
The options used are short-dated (meaning they typically have near-term expiration dates ranging from zero to five days) and will be reset daily. The approach is intended to collect option premium more frequently than longer-dated option structures. The option position is closed by the end of the trading day, leaving the underlying stock exposure fully uncapped overnight.
This structure is designed to keep most of the exposure to the underlying stock, while seeking to generate option premium.
Designed for Upside Participation
A simple idea behind frequent option-writing approaches is that selling options more frequently can change the tradeoff between premium collected and how much of the portfolio is overwritten.
Shorter-dated options allow income to be generated in smaller, more frequent increments, often adding up to more than longer-dated options. For example, a one-year option may generate approximately 9% in premium [1], while a one-month option may generate around 2.4%. Selling the one-year option once produces that 9%, whereas selling the one-month option 12 times over the year would generate closer to 30%.
Because option premiums are generated more frequently, less of the portfolio needs to be overwritten. In this example, only about one-third of the portfolio would need to be overwritten to match the same 9% of premiums.
We apply this same principle on a daily basis. Because options are written daily, the strategy can generate income while only overwriting a small portion of the portfolio (up to 25% with an initial target of 10%) leaving the majority uncapped and exposed to upside.
More Efficient Time Decay Capture
Option values do not change linearly with time. In many options models, time value is often described as scaling non-linearly with time to expiration (commonly approximated by the square root of time, all else equal). Selling options close to expiration may thus generate more premium and repeatedly capture this faster decay than if the relationship were linear.
Option Time Value only. Not representative of the total value of an option, which is affected by other factors.
By focusing on shorter-dated options and resetting positions daily, the strategy seeks to capture time decay more continuously than approaches that rely primarily on longer-dated options.
Seeks Full Overnight Equity Exposure
Since option positions are closed by the end of the trading day, investors remain fully exposed to overnight price movements, which can be meaningful and can occur for many reasons, including earnings announcements, macro developments, and geopolitical events.
A meaningful portion of equity returns has historically occurred outside of regular trading hours. Some research even shows that, over long periods, the majority of market gains have been realized overnight rather than during the trading day.[2]
Taken together, these three elements reinforce the core idea: seek to generate option premium more frequently, without surrendering most of the underlying exposure.
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How the Strategy Works
The fund is designed to follow a systematic approach:
The fund intends to make distributions weekly, which may be sourced from income, capital gains, and/or return of capital.
A Different Approach to Standard Income Strategies
There are common approaches to generating option premium from equities.
Traditional buy-write strategies sell call options across a larger portion (or all) of a portfolio, which can meaningfully limit upside participation if the underlying rises. Other approaches may increase overwrite levels, adjust strikes, or change option frequency in ways that can increase premium collection, while also increasing the likelihood of foregone upside and/or different risk exposures.
Daily Income ETFs are designed differently.
By using options on a smaller portion of the portfolio and resetting more frequently, the strategy is intended to keep significant exposure to stock performance, while still earning option premiums.
Here’s a high-level comparison of typical structural characteristics (actual fund implementation may differ):
Potential Use Cases for the Strategy
Daily Income ETFs can be applied in a range of contexts, depending on the objective:
Whether enhancing income, complementing bonds, or replacing covered call strategies, Daily Income ETFs can complement a range of investment strategies.
Daily Income ETFs represent a different way to seek income from equities.
By using shorter-dated options more frequently and on only a portion of the portfolio, the strategy is designed to collect option premium in smaller, repeated steps without overwriting the entire position.
Traditional approaches often generate option premium by overwriting more of the portfolio, surrendering a lot of upside. Daily Income ETFs are designed to seek option premium while remaining significantly exposed to the underlying stock.
[1] Using Black-Scholes options pricing model for an at-the-money call option, with 20% volatility, 3.5% interest rate, and 1.2% dividend yield
[2] Glasserman, Paul and Krstovski, Kriste and Laliberte, Paul-Robert and Mamaysky, Harry, Does Overnight News Explain Overnight Returns? (July 02, 2025). Columbia Business School Research Paper No. 5336382.