DIVO - SPYI: An Evolved Call Option Approach To Generate Income Yielding Over 11%

September, 20 2023 08:45 AM Amplify YieldShares CWP Dividend & Option Income

2023-09-20 08:45:00 ET

Summary

NEOS Investments offers high-income ETFs that utilize an options overlay strategy to generate monthly income.
The Neos S&P 500 High Income ETF stands out for its unique approach of writing and buying call options on the S&P 500 index.
SPYI has outperformed other popular high-income ETFs in terms of capital appreciation, distribution income, and total return, making it an attractive option for income-focused investors.

It seems like there are more call option strategy exchange-traded funds (ETFs) and closed-end Funds (CEFs) being introduced into the market. Frankly, I am not surprised as there are different option strategies that can generate income, including an overlay covered-call strategy or an options wheel. I have utilized three types of options strategies to generate income: writing cash-secured puts on positions I want to own at a lower price, selling covered calls on positions I own, and running an option wheel strategy. Some of the ETFs and CEFs that utilize different option strategies to generate income are interesting and allow investors to benefit from this corner of the market without having to do any of the work. Several readers of my Dividend Harvesting Portfolio Series on Seeking Alpha ( can be read here ) have recommended that I look into the Neos S&P 500((R)) High Income ETF (SPYI). I had never heard of NEOS Investments before, and after looking into the company and SPYI, I am extremely interested in what this company is doing. I am not currently invested in any of their products, but from an income perspective, their ETFs seem like a strong compliment on the income side of my portfolio. I plan on starting a position in SPYI soon and feel that the management team at NEOS is really on to something. Please do not start writing options contracts or investing in investment products that run an options strategy because it is something that I do. Please conduct enough due diligence to decide if it fits your investment parameters and if you can tolerate the risk.

Seeking Alpha

NEOS Investments (Next Evolution Options Strategies) is a newer investment firm with an interesting approach through The NEOS S&P 500 High Income ETF

Since NEOS Investments is an unknown firm compared to Vanguard or BlackRock ( BLK ) I wanted to provide a quick overview prior to discussing SPYI. NEOS has taken a different approach toward ETFs that utilize an option strategy with the goal of creating evolved option-based income solutions for investors. Many funds that I have seen are one-dimensional, as they utilize a call option overlay strategy to generate additional income for their investors. NEOS has three ETFs that are bound to their principles of generating high monthly income through ongoing data-driven research in a tax-efficient manner. What makes the strategy from NEOS interesting compared to some of the other products I have seen is how they are utilizing options. NEOS has created a high-income ETF, an aggregate bond ETF, and a cash alternative ETF. For more information about NEOS and their different investment products, please click here .

SPYI is an actively managed ETF from NEOS that invests in the companies that make up the S&P 500. SPYI utilizes an options overlay strategy that is a bit different from other popular high-income ETFs. While the Global X ETFs deploy a covered call options overlay writing call options on their respective indexes and the JPMorgan Equity Premium Income ETF ( JEPI ) utilizes an options strategy within the exchange linked note ((ELN)) portion of its portfolio, NEOS has gone a step further. NEOS has implemented an options strategy within SPYI where it writes or sells call options and buys call options on the S&P 500 index. SPYI generates income from the premiums earned from selling options as well as the dividends from its portfolio holdings. The premium received from the call options creates a net credit where the premium received from writing option contracts exceeds the cost of buying call options.

This strategy is interesting because it generates monthly income that qualifies under Section 1256 Contracts in the Internal Revenue Code . I am not a CPA, and this is not tax advice; this is directly from the SPYI prospectus.

The Fund seeks tax efficient returns by utilizing index options that receive favorable tax treatment under Internal Revenue Code rules because they qualify as "Section 1256 Contracts." Under these rules, each section 1256 contract held by the Fund at year end is treated as if it were sold at fair market value on the last business day of the tax year. If the Section 1256 contracts produce capital gain or loss, gains or losses on the Section 1256 contracts open at the end of the year, or terminated during the year, are treated as 60% long term and 40% short term, regardless of how long the contracts were held. In addition, the Fund may seek to take advantage of tax loss harvesting opportunities by taking investment losses from certain equity and/or options positions to offset realized taxable gains of equities and/ or options. Opportunistically, the Fund may seek to take advantage of tax loss harvesting opportunities on the SPX call options and/ or equity positions.

After reading through the strategy, I am bullish on the fund from an income perspective. The strategy revolves around the delta between selling and buying options. When SPYI writes a short call option, a premium is generated as NEOS is selling the right to purchase the underlying assets in the future at a certain price. Hypothetically, let's say the premium generated is $1. SPYI then takes that $1 of premium and purchases long out-of-the-money call options at a lower rate, hypothetically $0.50. This creates a net credit of $0.50, which is the remaining income that can be distributed to their investors. This opportunistic strategy generates income and protects the upside by owning out-of-the-money call options.

Has the strategy worked that NEOS deployed?

I was surprised, to say the least, when I read the chart below. I am invested in the Global X S&P 500 Covered Call ETF (XYLD), JEPI, and the Amplify CWP Enhanced Dividend Income ETF (DIVO). Since SPYI's inception, it has outperformed XYLD, JEPI, and DIV. I also wanted to create my own criteria to look at things a bit differently.

NEOS

I am going to look at SPYI, XYLD, JEPI, and DIVO on a YTD basis from capital appreciation, distributions generated, and total return.

SPYI Metrics