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XLU: Turning A Utility ETF Into An Income Engine

Geoff Considine profile picture
Geoff Considine


  • Income investors often favor utilities.
  • Selling covered calls against XLU can provide total income of 7% or more.
  • The option-implied price return outlook is neutral, making covered calls more attractive.
  • It is important to carefully choose the strike price at which to sell covered calls.

Utilities are a common holding for income investors. Valuations for utilities are high enough today that the yield on fresh purchases looks less attractive. One alternative for income investors is to sell covered calls or cash-secured puts to generate additional income. In some recent analysis, I have been impressed by how much income was available from selling covered calls on individual utility stocks. Selling covered calls on Southern Company (SO), for example, recently provided more than 9% in annual income (dividend + call premium).

I have also found a covered call strategy on NextEra (NEE) to look compelling. Because of the diversification benefit of owning a fund, some investors may prefer option-based income strategies using an ETF. In this article, I examine the risk, return, and income potential of covered calls and cash secured puts with the Utilities Select Sector SPDR ETF (NYSEARCA:XLU, expense ratio 0.12%, dividend yield 3.3%).

One-year price chart and basic stats for XLU (Source: Seeking Alpha)

Once you start to consider covered calls, income investing gets more interesting. It is important to balance risk, potential for price appreciation, option premium income, and the probability that the option will be exercised and the shares will be called away, in which case dividend income ceases.

Price Return Outlook for XLU

I generally favor longer-dated options for income strategies. Having to roll a strategy forward as options expire takes time and I’d rather do it as infrequently as is reasonable. For this analysis, I am looking at options on XLU that expire on January 21, 2022, between ten and eleven months from now.

The market prices of options provide information about traders’ consensus outlook on the probability of the price going above a certain level (call options) or below a certain level (put options) over some period of time (from today until the expiration date

This article was written by

Geoff Considine profile picture
Geoff has worked in quantitative finance for more than twenty years. Before entering finance, Geoff was a research scientist for NASA. Geoff holds a PhD in Atmospheric Science from the University of Colorado - Boulder and a BS in Physics from Georgia Tech. Neither Geoff Considine nor Quantext (Geoff's company) are investment advisors. Nothing in any commentary here on Seeking Alpha or elsewhere shall be regarded as advice.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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