Understanding Covered Call Income: Premiums, Distributions, and Return of Capital Tax Treatment

Option premiums are a function of expected volatility: the more movement the market anticipates in an underlying security, the more a buyer will pay for optionality. This relationship is the economic foundation of a covered call ETF, which generates its income by selling that optionality.

Since 2020, volatility has run structurally higher. The VIX, which measures implied volatility on the S&P 500, averaged 15.13 in the five years preceding 2020 and 20.87 since, resulting in richer premiums for option writers. While many covered call products capture this volatility at the index level, REX writes its options on individual securities seeking higher premiums while preserving more room for participation by writing options slightly out of the money.

Source: Cboe. VIX averages reflect daily closing values for the periods 1/1/2015–12/31/2019 and 1/1/2020–6/30/2026.

Our equity premium income suite is structured based on this approach: FEPI (REX FANG & Innovation Equity Premium Income ETF), AIPI (REX AI Equity Premium Income ETF), and CEPI (REX Crypto Equity Premium Income ETF).

This post walks through how option premium is designed to be generated, why our distributions are currently classified as majority return of capital, and trade-offs of covered call writing.

Each fund holds a basket of individual stocks and sells call options against them.

REX applies a systematic covered call strategy across diversified portfolios of individual equities. Our ETFs:

• Overwrite 100% of the portfolio to capture elevated premiums, while writing slightly out of the money to strive for a balance between income generation and upside participation.
• Target short-dated (1-month) expiries to allow frequent repricing of volatility and strikes as market conditions evolve.
• Distribute the collected option premium as weekly income, rather than relying on leverage or capital-based enhancements.

A call option gives the buyer the right to purchase a security at a predetermined price, known as the strike price, on or before a specified expiration date. In exchange for granting that right, the seller receives a cash payment, or premium, at the time of sale.

Consider a hypothetical position held at $50 against which a one-month call is written at a $55 strike for a premium of $2:

• Underlying below $55 at expiration. The option expires worthless. The seller retains both the shares and the $2 premium.
• Underlying above $55 at expiration. The option is exercised and the shares are delivered at $55. The seller realizes $5 of appreciation plus the $2 premium, for a maximum outcome of $7. Appreciation beyond $55 accrues to the option buyer.
• Underlying declines. The $2 premium is retained and offsets a portion of the decline, lowering the effective breakeven to $48.

The economic substance of the transaction is an exchange of contingent future appreciation for certain income today. A covered call ETF executes that exchange systematically and continuously across a portfolio of positions, distributing the premium collected to shareholders.

The term “covered” denotes that the fund already holds the shares against which the options are written. The fund is therefore never obligated to acquire the security in the open market on unfavorable terms in order to satisfy an exercised contract.

Most covered call ETFs write options on a broad index, typically the S&P 500 or the Nasdaq-100, whereas REX writes options on each portfolio constituent individually.

Single-name options are priced at higher implied volatilities than index options. An index aggregates the idiosyncratic risk of its constituents, much of which diversifies away, so the index realizes lower volatility than its average member. An individual issuer has no such offset. Earnings results, product cycles, and management transitions transmit directly to the security, and option buyers pay for that dispersion.

Higher implied volatility translates into greater premium capture. It also features a second, less apparent advantage: the capacity to write further out of the money. The table below shows estimated monthly premium at strikes 1% and 5% above spot at two levels of implied volatility:

Source: REX Shares. Hypothetical illustration of option pricing on a 30d call; not fund performance. For illustrative purposes only. Investing involves risk, including loss of principal.

In low-volatility conditions, moving the strike further out of the money forfeits more than half of the available premium, which pressures a manager toward near-the-money strikes and correspondingly tight caps on participation. At elevated volatility levels, the same adjustment costs roughly a quarter of the premium. Higher-volatility underlying stocks therefore allow strikes to be set further above spot while still generating economically meaningful income, preserving more room for appreciation before the cap binds. That is the rationale for writing calls on individual names rather than on an index.

Over the trailing twelve-month period, monthly premium collected exceeded monthly distributions paid in each of the three funds, averaging:

Source: REX Shares as of 7/31/2026.

Distributions are not guaranteed, are declared at each Fund’s discretion, and the amounts will likely vary greatly from one distribution to the next. There is no assurance that premium collected will continue to exceed distributions paid.

Each Fund’s current Distribution Rate is shown below alongside its 30-Day SEC Yield:

Source: REX Shares. Distribution Rate as of 8/18/2026; 30-Day SEC Yield as of 7/31/2026. The Distribution Rate is a non-standardized yield and is not indicative of future distributions.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Performance current to the most recent month-end can be obtained by calling 844-802-4004. Short term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. For standardized performance, please visit each Fund’s page at rexshares.com.

Distribution Rate (as of 8/18/2026): The Distribution Rate is the annual rate an investor would receive if the most recently declared distribution, which includes option income, remained the same going forward. The Distribution Rate is calculated by multiplying an ETF’s Distribution per Share by fifty-two (52), and dividing the resulting amount by the ETF’s most recent NAV. The Distribution Rate represents a single distribution from the ETF and does not represent its total return. Current distributions consist of 100% estimated return of capital (ROC) for all three funds. ROC is not taxable in the year received and reduces an investor’s cost basis. Distributions are not guaranteed, are declared at the Fund’s discretion, and the amounts will likely vary greatly from one distribution to the next. For full details on the composition of distributions, please refer to each Fund’s latest 19a-1 notice. Final determination of a distribution’s tax character will be made on Form 1099-DIV.

30-Day SEC Yield (as of 7/31/2026): The 30-Day SEC Yield represents net investment income, which excludes option income, earned by such ETF over the 30-Day period, expressed as an annual percentage rate based on such ETF’s share price at the end of the 30-Day period.

Over this period, distributions were funded from premium the strategy generated rather than in excess of it.

Writing a call caps participation in the underlying at the strike price and the consequence of that cap varies with the market environment:

• Declining markets. Premium collected offsets a portion of the decline. The funds remain exposed to losses on their holdings, though less so than an equivalent position carrying no premium.
• Range-bound markets. Premium is collected while the underlying holdings are flat. This is the environment to which the structure is best suited.
• Modestly rising markets. The funds collect premium and participate in appreciation up to the strike price.
• Sharply rising markets. Participation is capped at the strike for that expiration. Premium is still collected, but appreciation above the strike does not accrue to the fund. This is the principal cost of the strategy, and in a sustained rally it can produce meaningful underperformance relative to holding the same securities outright.

Because the options are reset monthly, the cap resets monthly as well. A single strong month constrains that month’s return rather than imposing a permanent limitation.

It is important to note that return of capital is a tax concept not an economic concept. An ETF distribution is classified as ROC to the extent it exceeds a fund’s taxable income for the year, and a covered call fund can generate limited taxable income.

Two mechanics drive that. Option premium is received as short-term gain, but calls that finish in the money are closed or settled at a loss, and those realized losses on the short call leg offset much of the premium. The equity leg, meanwhile, turns over slowly, so appreciation in the underlying holdings goes largely unrealized. The result is a fund distributing substantial cash while reporting limited taxable income, and the excess is characterized as return of capital.

The return of capital label by itself proves nothing about the health of the strategy. The same characterization arises whether distributions are funded by premium the strategy earned or by liquidating holdings to meet a distribution the strategy did not cover. Total return, not the tax character of the distribution, is what distinguishes the two, and an investor should read NAV over time alongside the distributions received.

ROC distributions are generally not taxable in the year received. They reduce cost basis, deferring taxation until the position is sold. Where shares have been held more than one year, the resulting gain is generally taxed at long-term capital gains rates, below ordinary income rates for most investors.

As an example, consider a $100,000 position paying a 25% annual distribution classified entirely as return of capital. Assuming no change in NAV and no reinvestment, basis is reduced by approximately $25,000 each year — to $50,000 after two years and $25,000 after three — and is exhausted in roughly four. At the higher distribution rates shown above, basis is exhausted faster still: under three years at 35% and roughly two and a half years at 43%. Once basis reaches zero, subsequent return of capital distributions are taxed as capital gains. The deferral is real, but it has a defined endpoint.

Investors with estate planning considerations should note one additional feature. Shares passing to heirs generally receive a step-up in basis to fair market value at the date of death, resetting prior ROC-related basis reductions. Treatment depends on individual circumstances, and investors should consult a tax adviser.

As of 7/31/2026. Market price and NAV returns are shown for identical periods.

Source: Bloomberg as of 7/31/2026. Gross expense ratios: FEPI 0.65%, AIPI 0.65%, CEPI 0.85%. S&P 500 returns are index returns and do not reflect fees or expenses.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Performance current to the most recent month-end can be obtained by calling 844-802-4004. Short term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns.

Standardized performance, full fund details, holdings, and disclosure documents are available at rexshares.com/fepi, rexshares.com/aipi, and rexshares.com/cepi.

Market Price: The current price at which shares are bought and sold. Market returns are based upon the last trade price.

NAV: The dollar value of a single share, based on the value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding. Calculated at the end of each business day.

Cboe Volatility Index (VIX): An index calculated and published by Cboe Global Markets that measures the market’s expectation of 30-day forward-looking volatility of the S&P 500 Index, derived from the prices of S&P 500 Index options.

Solactive FANG Innovation Index (SOLFANGT): FEPI’s reference index. An index maintained by Solactive AG comprising 15 equally weighted U.S.-listed technology stocks — eight core large-cap names plus seven additional top-traded technology stocks selected from designated FactSet industries. The Index is rebalanced monthly and reconstituted quarterly.

BITA AI Leaders Select Index (BAILSI): AIPI’s reference index. A rules-based index maintained by BITA comprising 25 U.S.-listed companies engaged in artificial intelligence across four thematic subcategories: AI hardware, AI software, AI enabling infrastructure, and AI services.

BITA Crypto Assets and Digital Payments Index (BCADPS): CEPI’s reference index. A rules-based index maintained by BITA comprising 25 U.S.-listed companies engaged in crypto-related activities — blockchain technology, crypto asset management and trading, crypto banking and payments, and crypto mining — together with digital payment systems. Constituents are weighted by 12-month average daily traded volume subject to a 5% issuer cap, rebalanced monthly and reconstituted quarterly.

S&P 500 Index: A market-capitalization-weighted index of 500 leading U.S. publicly traded companies. The Index does not employ an option strategy.

Indexes referenced in this material are unmanaged, cannot be invested in directly, and do not reflect any management fees, transaction costs, or expenses.

This material must be preceded or accompanied by a prospectus. Please read the prospectus carefully before investing. Prospectuses: FEPI, AIPI, CEPI.

Index Comparison: The S&P 500 is an unmanaged index, cannot be invested in directly, and does not employ an option strategy. Index returns do not reflect any management fees, transaction costs, or expenses.

THE FUNDS, TRUST, ADVISER, AND SUB-ADVISER ARE NOT AFFILIATED WITH THE FUNDS’ UNDERLYING SECURITIES.

Important Risk Information: Investing in the Funds involves a high degree of risk. As with any investment, there is a risk that you could lose all or a portion of your investment in the Funds.

Sector Concentration Risk. The trading prices of the Funds’ underlying securities may be highly volatile and could continue to be subject to wide fluctuations in response to various factors. The stock market in general, and the market for technology companies in particular, where applicable, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies.

Industry Concentration Risk. In following its methodology, each Index from time to time may be concentrated to a significant degree in securities of issuers located in a single industry or industry group. To the extent that an Index concentrates in the securities of issuers in a particular industry or industry group, the Fund will also concentrate its investments to approximately the same extent. By concentrating its investments in an industry or industry group, a Fund may face more risks than if it were diversified broadly over numerous industries or industry groups.

Liquidity Risk. Some securities held by the Funds, including options contracts, may be difficult to sell or be illiquid, particularly during times of market turmoil.

Derivatives Risk. Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Funds’ investments in derivatives may pose risks in addition to, and greater than, those associated with directly investing in securities or other ordinary investments, including risk related to the market, imperfect correlation with underlying investments or a Fund’s other portfolio holdings, higher price volatility, lack of availability, counterparty risk, liquidity, valuation and legal restrictions.

Call Writing Strategy Risk. The path dependency (i.e., the continued use) of a Fund’s call writing strategy will impact the extent that the Fund participates in the positive price returns of the underlying reference securities and, in turn, the Fund’s returns, both during the term of the sold call options and over longer time periods.

Price Participation Risk. Writing covered call options limits a Fund’s participation in the appreciation of its underlying holdings above the strike price of the options written.

Options Contracts. The use of options contracts involves investment strategies and risks different from those associated with ordinary portfolio securities transactions. The prices of options are volatile and are influenced by, among other things, actual and anticipated changes in the value of the underlying instrument, including the anticipated volatility, the time remaining until the expiration of the option contract, and economic events.

High Portfolio Turnover Risk. The Funds may actively and frequently trade all or a significant portion of their holdings. A high portfolio turnover rate increases transaction costs, which may increase a Fund’s expenses.

Non-Diversification Risk. Because each Fund is non-diversified, it may invest a greater percentage of its assets in the securities of a single issuer or a smaller number of issuers than if it was a diversified fund.

Distribution Risk. As part of each Fund’s investment objective, the Fund seeks to provide current weekly income. There is no assurance that a Fund will make a distribution in any given week. If a Fund does make distributions, the amounts of such distributions will likely vary greatly from one distribution to the next. Additionally, the distributions, if any, may consist of returns of capital, which would decrease the Fund’s NAV and trading price over time. As a result, an investor may suffer significant losses to their investment.

NAV Erosion Risk Due to Distributions. When a Fund makes a distribution, the Fund’s NAV will typically drop by the amount of the distribution on the related ex-dividend date. The repeated payment of distributions by a Fund, if any, may significantly erode the Fund’s NAV and trading price over time. As a result, an investor may suffer significant losses to their investment.

Crypto Asset Risk (CEPI). While the Fund will not invest directly in a crypto asset, the value of the Fund’s investments in publicly traded securities of companies engaged in crypto asset-related businesses and activities are subject to fluctuations in the value of a crypto asset, which may be highly volatile. Crypto assets are relatively new, and their value is influenced by a wide variety of factors that are uncertain and difficult to evaluate. Federal, state and/or foreign governments may restrict the use and exchange of crypto assets, and regulation in the U.S. is still developing.

Solactive AG (“Solactive”) is the licensor of the Solactive FANG Innovation Index. The financial instruments that are based on the Index are not sponsored, endorsed, promoted or sold by Solactive and Solactive makes no express or implied representation, guarantee or assurance with regard to: (a) the advisability in investing in the financial instruments; (b) the quality, accuracy and/or completeness of the Index; and/or (c) the results obtained or to be obtained by any person or entity from the use of the Index.

REX is a registered trademark of REX Shares, LLC (“REX”), which has been licensed for certain purposes by the Adviser and the Funds. The Funds are not sponsored, endorsed, or sold by REX, its affiliates (including the Adviser), by Solactive AG, or by BITA, and none of them makes any representation regarding the advisability of investing in such product(s).

The information presented herein is not intended to be tax advice. Return of Capital classification is an estimate and subject to change. Investors should consult with a qualified tax professional to understand the implications specific to their individual circumstances.

Funds distributed by: Foreside Fund Services, LLC, not affiliated with REX Shares, LLC, or its affiliates.