How Retirees With 100 Shares of IWM Are Pulling High Income From Covered Calls

The iShares Russell 2000 ETF (IWM) isn’t exactly an income powerhouse. After deducting its 0.19% expense ratio, the ETF currently sports a 0.95% 30-day SEC yield as of May 31, 2026. Small-cap companies tend to be in growth mode. If they’re profitable at all, management is often reinvesting cash flow back into the business rather than paying it out as dividends.

If you own 100 shares of IWM, however, a completely different source of income becomes available. Specifically, you can generate income by selling covered calls against your position. Depending on your preference, these can be daily, weekly, or monthly contracts.

IWM is particularly attractive for this strategy because it is one of only a handful of ETFs with daily-expiring options. It also has a wide range of strike prices and high open interest, meaning there are plenty of buyers and sellers in the market. Higher open interest generally translates into tighter bid-ask spreads and better liquidity, making it easier to enter and exit positions efficiently.

Moreover, small-cap stocks tend to be more volatile than their large-cap counterparts. That higher implied volatility often results in larger option premiums for sellers. Let’s walk through a simple example and go over some of the pros and cons.

How To Sell IWM Covered Calls

I’m writing this as of June 19, 2026. Technically it’s Juneteenth, so markets are closed, but IWM finished the prior session at $295.59 per share. Remember, a covered call requires ownership of 100 shares. That means your starting capital requirement would be approximately:

• 100 shares × $295.59
• Total capital required: $29,559

Next comes strike selection and expiration. You can sell daily, weekly, or monthly calls. Daily options generate premium more frequently, but require constant monitoring and leave little room to adjust if the trade moves against you. Personally, I prefer monthly contracts, typically around 30 to 45 days to expiration. That tends to be a sweet spot where time decay, also known as theta, works heavily in the seller’s favor while still providing some flexibility.

For this example, let’s use the July 17, 2026 expiration. With IWM trading around $295, I don’t want to sell an at-the-money call. While that would generate the largest premium, it would also cap nearly all upside. Instead, let’s use the $310 strike. The option currently shows:

• Bid: $1.87
• Ask: $1.92
• Midpoint: $1.895

Since each option contract controls 100 shares, the premium received would be:

• $1.895 × 100
• Premium collected: $189.50

Against the initial capital requirement of $29,559, that’s an immediate yield of approximately 0.64% for one month. If we annualize that by multiplying by 12, the theoretical yield works out to 7.7%.

Of course, that’s purely hypothetical. Option premiums fluctuate constantly based on volatility, interest rates, and market conditions. There is no guarantee future contracts will generate similar income. Still, it illustrates how an ETF yielding less than 1% can potentially generate much higher cash flow through option premiums.

The Risks You Need To Understand

Covered calls are not free money. By expiration, one of three things will happen.

1. IWM finishes below $310 but above your cost basis: This is generally the ideal outcome. You keep your shares and retain the entire $189.50 premium. The option expires worthless and you can sell another call.
2. IWM finishes above $310: Your shares will be called away. You still keep the premium and benefit from price appreciation between your purchase price and the strike price, but any gains beyond $310 belong to the option buyer.
3. IWM falls sharply below your cost basis: You still keep the premium, but the premium may be tiny compared to the decline in the underlying ETF. Small-cap stocks are particularly sensitive to economic data, credit conditions, and recession fears due to their heavier exposure to domestic economic activity.

Scenario 3 is what I dislike about covered calls. If IWM drops substantially below your cost basis, you may find yourself in an uncomfortable position. Selling calls above your original purchase price may no longer generate meaningful premiums. Meanwhile, selling lower strikes increases the risk of getting assigned below your cost basis.

In other words, you can end up bag-holding a declining position while collecting less income than you originally expected. That’s why covered calls should never be viewed as a hedge. They provide a modest income cushion, but you still retain most of the downside risk.

The strategy works best in flat, slowly rising, or moderately volatile markets. It becomes much less attractive during sharp declines. Still, for investors willing to accept the tradeoff, covered calls can transform a low-yield ETF like IWM into a substantially higher-income position.