With markets looking increasingly volatile, investors might be more interested in generating income rather than capital gains. 

Bond investments have seen significant capital losses in recent months as inflation concerns continue to have investors anxious.

As sophisticated investors, we can generate increase the yield provided by bond ETFs through the use of options. The strategy is a known as a covered call which involves selling call options against a stock position.

Let’s use the iShares 20+ Year Treasury Bond ETF (TLT) as an example.

TLT Covered Call Example

When running the Covered Call Screener for TLT, we find the following results:

Let’s evaluate the first TLT covered call example. 

Buying 100 shares of TLT would cost $9,041. The March 21, 2025 call with a strike price of 106 was trading yesterday around $1.12, generating $112 in premium per contract for covered call sellers.

Selling the call option generates an income of 1.3% in 121 days, equalling around 3.78% annualized. That assumes the stock stays exactly where it is. What if the stock rises above the strike price of 97?

If TLT closes above 97 on the expiration date, the shares will be called away at 97, leaving the trader with a total profit of $771 (gain on the shares plus the $112 option premium received). That equates to a 8.6% return, which is 26.0% on an annualized basis.

Let’s look at another example using a shorter-term expiration.

Instead of the March 97 call, let’s look at the December 93.50 call. Selling the 93.50 call option for $0.48 generates an income of 0.5%, but in only 43 days, equalling around 6.5% annualized. 

If TLT closes above 93.50 on the expiration date, the shares will be called away at 93.50, leaving the trader with a total profit of $358 (gain on the shares plus the $48 option premium received).

That equates to a 4.0% return, which is 48.3% on an annualized basis.

Of course, the risk with the trade is that the TLT might continue to drop, which could wipe out any gains made from selling the call. 

Traders that think bond yields will continue to rise (and prices drop) would not enter this trade.

Barchart Technical Opinion

The Barchart Technical Opinion rating is a 56% Sell with a Weakening short term outlook on maintaining the current direction.

Implied volatility is at 15.42% compared to a 12-month low of 10.82% and a 12-month high of 20.50%. The implied volatility rank is 47.49% and the IV percentile is 69%.

TLT currently yields around 4.07% annually.

Profile

The iShares 20 plus Year Treasury Bond ETF seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than twenty years.

Bond investments are a common component of most investment portfolio, but they have suffered significant capital losses recently. Using covered calls can increase the yield component of your bond investments. 

Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.