Income Investing 101: What are Covered Calls and How Do They Work?

by | Sep 29, 2026

Harvest ETFs, is one of Canada’s largest providers of covered call option ETFs. Through its comprehensive suite of income exchange traded funds (ETFs) Harvest ETFs has paid out over $3 billion in total distributions over the period October 2016 to July 2026.

This is great news for Canadian income seeking investors, as they could get access to high-quality stocks, with an investment team writing options on the securities, to support regular income generation.

For new investors, though the idea of covered call options might be intimidating. So here we try to answer some questions that you might have.

What Are Covered Calls?

A call option is a purchased agreement between two parties: the option seller and the option buyer. The buyer pays a premium to the seller for the right, but not the obligation, to buy a stock at a fixed price within a specified time frame. The seller keeps the premium regardless of what happens later.

For example, you want to buy shares in company ABC, but you also want to see where those shares will go in the next month. You find a seller and pay them a premium which locks in a specific price for 30 days. If the share price of company ABC goes up during that period you can exercise your call option and buy the shares at the agreed-upon lower price. If the share price drops you can let your option expire, and you are only out the premium you paid.

From the seller’s perspective, these are usually called covered call options. Sellers engaging in a covered call option strategy are looking to earn income in the form of premiums from selling call options—also called writing—on shares they currently own. For example, let’s say you own shares of company ABC, priced at $100 today. You decide to write covered call options on your shares, selling a buyer call options for a $3 premium. Here’s what would happen in three hypothetical scenarios:

  1. Scenario A- ABC Shares Go Up: ABC shares go up to $105, the buyer exercises their call option, and you sell your shares to them for $100. You lost out on the price increase, but you were covered and you keep the $3 premium ($100 + $3 = $103).
  2. Scenario B – ABC Shares Stay the Same: ABC shares stay at $100, the buyer does not exercise their call option and you keep the $3 premium ($3 premium + your shares).
  3. Scenario C –ABC Shares Go Down: ABC shares drop to $95 and the buyer does not exercise their call. The value of your portfolio drops but is cushioned by the $3 premium leaving a value equivalent to $98.

What are Covered Call ETFs

Like the stock example covered above, a covered call ETF actively invests in stocks, and then at the same time, write call options on those same stocks. This caps the upside of the ETF, but all the premiums collected from the writing of the call options are distributed to investors and offer them additional cash flow. These funds are of special interest to investors who seek income.

A Harvest ETFs Investment Associate breaks down the Harvest covered call option writing strategy here.

Why Harvest ETFs for a Covered Call Strategy?

Harvest ETFs is a market leader in call option ETFs. These Covered Call ETFs are designed to generate cashflows for unitholders from a portfolio of securities with a covered call option writing strategy. Harvest launched its first ETFs in 2016 and has established itself as one of the leading option writing firms in Canada.

Covered call option writing is about striking the right balance. Harvest ETFs integrates that balance into a long-term view of investing. At its most basic level, when you write a covered call option, you gain premiums but can miss some market upside. Because Harvest Equity Income ETFs are designed to capture long-term growth and consistent income, they strike the right balance between premiums and upside exposure. You can find out more here.

Disclaimer

For Information Purposes Only. All comments, opinions and views expressed are of a general nature and should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies.

Commissions, management fees and expenses all may be associated with investing in Harvest Exchange Traded Funds managed by Harvest Portfolios Group Inc. (the “Funds”). Please read the relevant prospectus before investing. The Funds are not guaranteed, their values change frequently and past performance may not be repeated.

Recent Insights

Disclaimer

For Information Purposes Only. All comments, opinions and views expressed are of a general nature and should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies.

Commissions, management fees and expenses all may be associated with investing in Harvest Exchange Traded Funds, managed by Harvest Portfolios Group Inc. (the Fund(s)). Please read the relevant prospectus before investing. The indicated rates of return are the historical annual compounded total returns (except for figures of one year or less, which are simple total returns) including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are paid to you in cash unless you request, pursuant to your participation in a distribution reinvestment plan, that they be reinvested into Class A, Class B or Class U units of the Fund. If the Fund earns less than the amounts distributed, the difference is a return of capital. Tax, investment and all other decisions should be made with guidance from a qualified professional.

The current yield represents an annualized amount that is comprised of 12 unchanged monthly distributions (using the most recent month’s distribution figure multiplied by 12) as a percentage of the closing market price of the Fund. The current yield does not represent historical returns of the ETF but represents the distribution an investor would receive if the most recent distribution stayed the same going forward.

Certain statements in the Harvest Insights are forward looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS.

FLS are not guarantees of future performance and are by their nature based on numerous assumptions, which include, amongst other things, that (i) the Fund can attract and maintain investors and have sufficient capital under management to effect their investment strategies, (ii) the investment strategies will produce the results intended by the portfolio managers, and (iii) the markets will react and perform in a manner consistent with the investment strategies. Although the FLS contained herein are based upon what the portfolio manager believe to be reasonable assumptions, the portfolio manager cannot assure that actual results will be consistent with these FLS.

Unless required by applicable law, Harvest Portfolios Group Inc. does not undertake, and specifically disclaim, any intention or obligation to update or revise any FLS, whether as a result of new information, future events or otherwise.