How to Use Covered Calls for Extra Income: A European ETF Investor’s Guide

Covered calls are a conservative options strategy that can help European ETF investors generate extra income from their existing holdings. In this guide, you’ll learn how to use covered calls step-by-step, which brokers and ETFs are suitable in Europe, how to calculate potential income, and what risks to watch out for. Whether you’re looking to boost returns on your portfolio or just curious about options, this tutorial will show you exactly how to get started—no guesswork required.

If you're new to ETF investing or want a broader foundation, see our European ETF Investing Playbook for a comprehensive overview.

Step 1: Understand What Covered Calls Are (and Why You’d Use Them)

A covered call means selling a call option on an ETF you already own. For each contract, you must hold 100 shares of the ETF. In return for selling this option, you receive a premium (income).

• Why do this? You earn extra income on top of any dividends and capital gains, especially if you think the ETF will stay relatively flat or rise only modestly.
• What’s the catch? If the ETF price rises above the option’s strike price, you may have to sell your shares at that price (potentially missing further upside).

Example: You own 100 shares of iShares Core MSCI World UCITS ETF (IWDA) at €60 per share. You sell a one-month call option with a strike price of €62 and receive €0.50 per share (€50 total). If IWDA stays below €62, you keep both your shares and the €50. If it rises above €62, your shares may be sold (“called away”) at €62, but you still keep the premium.

Step 2: Check If Your ETF and Broker Are Eligible

Not all European ETFs have options traded on them, and not all brokers support options trading for retail investors in Europe.

• ETF eligibility: The ETF must be listed on an exchange with an active options market (e.g., Euronext, Xetra, or LSE). Examples: iShares Core MSCI World UCITS ETF (IWDA), Invesco EQQQ NASDAQ-100 UCITS ETF (EQQQ), iShares Core S&P 500 UCITS ETF (CSPX).
• Broker eligibility: Most EU brokers (e.g., Trade Republic, Scalable Capital) do not support options trading. The main accessible options brokers for Europeans are:
  • Interactive Brokers – supports options trading on European and US-listed ETFs, with multi-currency accounts
  • DEGIRO – supports options trading on selected European exchanges (not US options for EU residents)

If you do not already have an account at one of these brokers, you’ll need to open one and complete their options trading approval process. This usually involves answering a questionnaire about your experience and agreeing to risk disclosures.

Expected outcome: You should now confirm your ETF is eligible (check for options volume and chains on your broker’s platform) and have a funded account with options trading enabled.

Step 3: Calculate Your Covered Call Potential—How Much Income Can You Earn?

Before placing your first trade, estimate your possible monthly income and understand the trade-off between premium received and risk of having your ETF “called away.”

• Premium: The income you receive per option contract (per 100 shares).
• Strike price: The price at which you may have to sell your ETF shares.
• Expiry: How long until the option expires (often 1 month for covered calls).

Example calculation (May 2024):

• You own 200 shares of IWDA at €60 each (total value: €12,000)
• Sell 2 call contracts (each covers 100 shares) with a strike price of €62, expiring in 1 month
• Premium per contract: €0.50 per share (€50 per contract, €100 total)

Outcome: If IWDA stays below €62, you keep your shares and €100 income for the month. If IWDA rises above €62, you may be forced to sell at €62, but you still keep the €100 premium.

Annualized return: If you repeat this each month, €100 × 12 = €1,200/year, or 10% on your €12,000 position (before tax and fees). In reality, premiums and outcomes will vary.

Step 4: Place a Covered Call Trade (with Platform-Specific Instructions)

Here’s how to place a covered call on Interactive Brokers and DEGIRO:

Interactive Brokers (IBKR)

1. Log in to IBKR Client Portal.
2. In the search bar, type your ETF ticker (e.g., “IWDA”) and select the correct listing (Euronext Amsterdam, Xetra, etc.).
3. Click “Options” to view the options chain.
4. Select a strike price just above the current ETF price (e.g., if IWDA is €60, look for €62 or €63).
5. Choose an expiry date (typically 1 month out).
6. Click “Sell to Open” on the call option row.
7. Enter the number of contracts (1 contract per 100 shares you own).
8. Review margin requirements and confirm the trade.

DEGIRO

1. Log in to DEGIRO.
2. Search for your ETF (e.g., “IWDA” or “EQQQ”) and select the exchange (Euronext, Xetra, etc.).
3. Click on “Options” to see available contracts.
4. Choose the call option (strike price and expiry) you want to sell.
5. Click “Sell” and enter the number of contracts (must match the number of 100-share blocks you own).
6. Confirm the order and check your open positions under “Portfolio.”

What can go wrong? If you select a strike price too close to the current price, your ETF shares may be called away quickly. If you choose a strike too far above, you may earn little premium.

Step 5: Monitor, Adjust, and Handle Expiry

After selling a covered call, you must monitor your position until expiry:

• ETF stays below strike: Option expires worthless, you keep the premium and your shares. You can sell another covered call next month.
• ETF rises above strike: Your shares may be automatically sold at the strike price. You keep the premium, but lose further upside. You can buy back the shares if desired (but at a higher price).
• Early assignment: In rare cases, your shares may be called away before expiry if the option is deep in-the-money.

Always check your broker’s notifications and account balances after expiry. Most platforms handle exercise/assignment automatically, but you should verify the outcome.

Step 6: Understand Taxes and Reporting (Europe-Specific)

Covered call premiums are taxable income in most European countries, but the exact treatment varies:

• In Germany, premiums are taxed as capital gains (Abgeltungssteuer, 25% plus solidarity surcharge and church tax if applicable).
• In the Netherlands, options income is generally covered by Box 3 wealth tax, unless you are deemed a professional trader.
• In France, Spain, and Italy, premiums are usually taxed as capital gains, subject to each country’s rates and allowances.

Always keep records of premiums received, options trades, and any exercise/assignment events. Consult your tax advisor or local tax authority for your personal situation.

Covered Call Income Projection Example (EUR)

Let’s look at a realistic monthly income scenario for a European ETF investor:

• ETF: iShares Core MSCI World UCITS ETF (IWDA)
• Shares owned: 300 (€60/share, €18,000 total value)
• Sell: 3 call contracts, 1-month expiry, strike price €62
• Premium: €0.50 per share (€150 total)

Monthly income: €150 (before tax and fees)

Annualized: €1,800, or 10% yield—if repeated every month and shares are not called away. In practice, income will vary based on volatility, market conditions, and ETF price movements.

For more on building diversified ETF portfolios, see our dividend ETF guide.

Common Mistakes

• Selling covered calls on illiquid ETFs: Wide bid/ask spreads can mean poor pricing and difficulty closing positions.
• Choosing strike prices too close to the current ETF price: Increases the chance of having your shares called away (especially in volatile markets).
• Not tracking tax obligations: Failing to report premium income can result in fines or penalties.
• Ignoring assignment risk: Shares can be called away at any time if the option is in-the-money, especially near ex-dividend dates.
• Overlooking diversification: Don’t use covered calls as a substitute for a well-diversified ETF portfolio. For more on avoiding concentration risk, see our ETF portfolio overlap guide.

Next Steps

• Read your broker’s official documentation on options trading: IBKR Options Trading FAQ | DEGIRO Options FAQ
• Practice with a small position (1 contract) before scaling up
• Experiment with different strike prices and expiries to find a balance between income and risk
• Review your ETF portfolio for overlap and diversification (see our ETF provider comparison)
• Consider dollar-cost averaging for new ETF purchases (detailed guide here)

Disclaimer: This article is for educational purposes only and does not constitute financial advice. Always do your own research and consider consulting a qualified financial advisor before making investment decisions.