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The now well-established ETF Industry has created a wealth of options for income-focused investors, with dividend-focused ETFs specializing in US and international names, large caps and small caps, and specific market sectors. (For a good list of 25 dividend-focused ETF's, click here).

Some of these ETFs are optionable, which allows long-term focused dividend investors the ability to not only gain yield from the funds themselves, but from covered call or cash-secured put options on those funds. The added yield from these options -- or added protection of principal -- can be important strategic weapons in the income investor's arsenal.

For example, an investor can use an out-of-the-money covered call while treating the underlying equity similar to a bond held to maturity, accepting temporary paper losses in return for higher yield, while cashing out a small short-term gain should shares rise. When using options with this strategy, the risk of being called out -- and thus forced to buy back in at a lower effective yield -- is exchanged for an increase in income should the fund stay flat or decline.

Please note that this is not necessarily a comprehensive list, nor a heavily researched recommendation. These are just some choices for income investors to research if they want to pursue an ETF covered call strategy to increase income while maintaining diversification.

Utilities Select Sector SPDR (XLU)
Closing Price 7/1: $33.92
Yield (ttm): 3.962%

XLU is a US-only fund that invests in utility stocks. Like the stocks it invests in, XLU has been relatively stable and has offered a solid 4% yield over the past twelve months.

XLU is trading near the top of its 52-week range, and up 22% for the year, so there may be some risk of buying in at the top. With the ETF's relatively low beta of .59, there is not much option yield. But the Jan 34 call (just slightly out of the money) does offer a bid of 1.13, 3.03% (and a bit over 6% annualized). The Jan 2013 35 strike offers a bid of 1.49, a 4.4% return, or roughly 3% annualized, while still offering a small amount of capital appreciation should the stock get called away.

Vanguard Dividend Appreciation ETF (VIG)
Closing Price 7/1: $56.77
Yield (ttm): 2.019%

VIG is a fund that tracks the Dividend Achievers Select Index, which encompasses only companies who have increased their dividends for ten consecutive years. Top holdings as of May 31st include Chevron (CVX), McDonald's (MCD), and Pepsi (PEP), according to the Vanguard website.

Like XLU, VIG is trading near its 52-week highs. It does offer better option yields, due to increased volatility in the underlying stocks, though bid/ask spreads are much wider. A November 58 call is bid at .70, offering 1.23% (a bit over 3% annually), while the longest-term February calls don't currently offer out-of-the-money calls. On the put side, a November 55 put offers a bid of $1.10, a 2.0% return (5.2% annualized) with a downside of committing to VIG at 53.90, a 5% discount from current price. Make sure to use limit orders when facing these kind of spreads, and realize the risk of lower liquidity with these types of ETF options.

Credit Suisse Cushing 30 MLP Index ETN (MLPN)
Closing Price 7/1: $24.50
Yield (ttm): 4.948%

MLPN uses a valuation formula to select 30 master limited partnerships (MLPs) for inclusion in this energy- and minerals-focused ETF. (Morgan Stanley now offers an similar product tracking the same index, traded under symbol MLPY.) It's important to note that MLPN is an Exchange Traded Note, NOT an ETF. An ETN is a debt product, not an equity fund, which offers different tax consequences and slightly different risks. Furthermore, remember that MLPs allow for so-called "pass-through" income, which may have tax consequences.

There appears to be no open interest in MLPN options, but NASDAQ data does show reasonable bid/ask spreads. That said, the option premiums are quite small; a December 25 call, barely out of the money offers only a bid of .30, a 1.2% return for a very small gain, considering the expected dividend of only about .60-.65 over the same time period. MLPN might be a stock to avoid with a covered call or cash-secured put strategy.

iShares Dow Jones Select Dividend Index Fund (DVY)
Closing Price 7/1: $53.68
Yield (ttm): 3.398%

DVY is one of the largest and most traded dividend ETFs (and definitely the largest on this list). It is designed to track the Dow Jones Select Dividend Index, which selects 100 stocks "by dividend yield, subject to screens for dividend per-share growth rate, dividend payout ratio and average daily dollar trading volume," according to the Dow Jones factsheet available at their website. The stocks are then weighted by annual dividend.

Because of its popularity, DVY offers good spreads and liquidity in its options, making it one of the most appropriate for a potential hedged bull strategy. A Dec 56 call is bid at .65, adding 1.2% (2.5% annualized) to our returns, with gains (including dividends) on the top end over 7%. A cash-secured Dec 50 put, bid at $1.05, offers 2.1% return (4.5% annualized) with the downside of owning DVY at $48.95 with, most likely, a higher yield.

JP Morgan Alerian MLP Index ETN (AMJ)
Closing Price 7/1: $37.30
Yield (ttm): 4.947%

Like AMLP and MPLN, AMJ is a product that tracks an index of energy-focused master limited partnerships. Again, please note that AMJ is an ETN, not an ETF. The December 38 call is bid at .50, adding 1.4% (about 3% annualized) to our return.

SPDR S&P Dividend ETF (SDY)
Closing Price 7/1: $54.84
Yield (ttm): 3.219%

SDY tracks the S&P High Yield Dividend Aristocrats Index, which consists of the 60 highest yielding members of the S&P Composite 1500 who have increased their dividends annually for 25 years or more. Top holdings as of June 30 include Pitney Bowes (PBI), Centurylink (CTL), and HCP Inc. (HCP), according to the SPDRS website. SDY is also well-traded (average daily volume over half a million shares.)

Unfortunately, SDY's trading volume has not transferred over to its option chain. Open interest is spotty at best, and spreads on the longer term options can be problematic. But the short-options may be worth looking at; for example, the Aug 55 call, nearly at the money, offers a 1.2% bump on a 7-week trade (though there is no dividend payment made in the interim).

Vanguard High Dividend Yield ETF (VYM)
Closing Price 6/30:
Yield (ttm): 2.745%

VYM tracks the performance of the FTSE High Dividend Yield Index, with 434 holdings including Exxon Mobil (XOM), Chevron (CVX), and Microsoft (MSFT) as the top three effective May 31st.

VYM also has very little open interest in its options and some spread issues, particularly with the January options.

WisdomTree Japan SmallCap Dividend Fund (DFJ)
Closing Price 6/30:
Yield (ttm): 2.222%

DFJ obviously presents some risk, as it focuses solely on a country ravaged just months ago by a devastating natural disaster. The ETF has struggled over its 5-year history as well, with a 9 percent loss since its inception just over five years ago. However, for the contrarian investor or one looking for international exposure, DFJ could be an interesting play. DFJ likewise has spotty open interest, but some interesting plays; the Sep 45 offers 1.2% (about 5% annualized).

Once again, this is neither a comprehensive list or a group of recommended targets, just some ideas for research when income investors are considering a covered call strategy to maximize their yield.

Source: 8 Optionable Dividend ETFs for Covered Call Income Maximization Strategies