What is a synthetic covered call?
In one line: A synthetic covered call copies owning a stock and selling a call against it using options only, by buying a call and selling a put at the same strike and then selling a higher call.
How it works
A normal Covered call is two pieces: 100 shares, plus one call sold against them. A synthetic covered call swaps the shares for options.
- Buy a Call option and sell a Put option at the same strike and expiry. Together they rise and fall like 100 shares. That pair is a Synthetic long.
- Sell a call at a higher strike. You collect the premium. That's the "covered call" part.
- Keep the cash set aside, often in a Treasury bill, to back the short put.
Many single-stock income funds, such as the YieldMax funds, use this design. As of October 2026, MSTY, TSLY and NVDY sell a call spread in step 2 instead of a single call: they also buy a call above it, which keeps some upside. The fund's prospectus says how it works. We work through one week of it in how YieldMax ETFs work. For the other fund designs, see how covered call ETFs work.
An example (hypothetical)
An illustration, not a trade idea. Made-up stock XYZ trades at $100. All options expire in one month.
- Buy the $100 call for $5.00 and sell the $100 put for $5.00. Net cost: $0. (In real markets the call usually costs a little more. I keep it even to make the math clear.)
- Sell the $105 call for $2.00, collecting $200.
- Set aside $10,000 in cash to back the put.
| XYZ at expiry | Synthetic covered call | Real covered call (100 shares) |
|---|---|---|
| $115 | +$1,500 − $1,000 + $200 = +$700 (capped) | +$700 |
| $100 | $0 + $200 = +$200 | +$200 |
| $90 | −$1,000 + $200 = −$800 | −$800 |
| $70 | −$3,000 + $200 = −$2,800 | −$2,800 |
The two columns match. Above $105 the gain is capped at $700. Below $100 the short put takes the full fall, just like owning the shares.
Why it matters for sellers
It's the same risk as a real covered call. The options don't make the downside smaller. They just remove the need to buy shares.
A few differences do matter:
- No dividends. You don't own shares, so you don't get paid them.
- Everything expires. The pair must be rolled forward, which costs something each time.
- Approval. The two calls make a spread, and the put is a short option. Your broker has to approve you for both, and some need a margin account. Ask what yours needs.
A short put alone at the higher strike carries almost the same shape too. That's why the wheel strategy treats a cash-secured put like owning the stock. The payoff that results can cause NAV erosion in a fund that keeps selling into falls.
Questions
Is a synthetic covered call riskier than a real one?
The payoff is nearly the same, so the market risk is the same. The added pieces are broker approval, roll costs and no dividends.
Why do funds use a synthetic covered call?
It gets the stock's ups and downs without buying shares, and the cash can sit in Treasury bills. It also lets a fund re-strike options without selling stock.
Can I set one up myself?
Yes, if your broker approves you for spreads and for selling puts. Most people who want this payoff just buy 100 shares and sell a call, which is simpler.
The Options Wheel System · for StructureX members
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