Volatility Risk Premium Captures Thanksgiving Market Gains
Yesterday, November 26, 2025, the U.S. Commerce Department released the October Personal Consumption Expenditures (PCE) price index. The data confirmed a 2.8 percent year-over-year increase in core prices. While this aligns with Federal Reserve projections, it underscores a persistent inflationary environment that continues to erode the purchasing power of traditional fixed-income yields. Equity markets responded with a late-session surge, pushing the S&P 500 to 6,812.61 and the Nasdaq-100 to 25,656.15. For income-focused investors, these price levels present a significant challenge: how to extract high yield without the massive tax drag associated with standard derivative strategies.
The Mathematical Moat of Section 1256 Contracts
Most income-generating ETFs utilize covered call strategies on individual equities. This approach triggers a 100 percent short-term capital gains liability on the premiums collected. At the top federal bracket, this results in a 37 percent tax hit. NEOS products like the S&P 500 High Income ETF (SPYI) and the Nasdaq-100 High Income ETF (QQQI) utilize a technically superior structure by trading index options. These instruments qualify as Section 1256 contracts under the Internal Revenue Code.
The advantage is purely numerical. Section 1256 contracts follow the 60/40 rule, where 60 percent of gains are taxed at the lower long-term rate (currently 20 percent) and 40 percent are taxed at the short-term rate. For a top-bracket investor, the effective tax rate drops from 37 percent to approximately 26.8 percent. This 10.2 percent delta represents the “hidden yield” that many retail investors overlook. Per the SEC guidance on tax-efficient investing, minimizing the tax-drag on distributions is the single most controllable factor in long-term total return.
Visualizing the Tax Drag Reduction
November 2025 Distribution Performance
Yesterday’s ex-dividend date for the NEOS suite confirmed that yield targets remain robust despite the 10-year Treasury yield stabilizing near 4.00 percent. According to the latest distribution announcement, the funds have maintained high double-digit distribution rates by harvesting the Volatility Risk Premium (VRP). The VRP is the historical tendency for implied volatility to exceed realized volatility, allowing index option sellers to pocket the difference as a profit margin.
The following table details the distribution amounts for November 2025, reflecting the performance of the Nasdaq-100 and S&P 500 components as of the November 26 close.
| Ticker | Nov 2025 Distribution | Annualized Rate | Primary Strategy |
|---|---|---|---|
| SPYI | $0.5216 | 11.94% | S&P 500 Index Options |
| QQQI | $0.6304 | 14.01% | Nasdaq-100 Index Options |
| BTCI | $1.0181 | 26.73% | Bitcoin High Income |
The Mechanics of NAV Preservation
Critics often cite NAV erosion in high-income ETFs. However, the data from 2025 suggests a different trajectory for index-based options strategies. Unlike traditional covered call funds that write options directly on 100 percent of their holdings, the NEOS management team utilizes a proprietary data-driven model to determine the optimal delta for their out-of-the-money (OTM) calls. This allows the funds to participate in a portion of the market’s upside, as evidenced by the SPYI price action throughout the November rally.
The funds also employ a “tax-loss harvesting” mechanism at the fund level. By using Section 1256 contracts, the managers can realize losses on the options themselves to offset gains, potentially classifying a portion of the distribution as a Return of Capital (ROC). This further defers tax liability until the investor sells the shares, effectively lowering the cost basis rather than creating an immediate tax event. For the November distributions, early estimates suggest that over 90 percent of the payout for QQQI and SPYI could be classified as tax-advantaged income.
Watching the December FOMC Pivot
Today’s Thanksgiving holiday provides a momentary pause in a high-velocity market. The focus now shifts to the December 17 Federal Reserve meeting. With the Core PCE holding at 2.8 percent, the market is pricing in an 87 percent probability of a 25-basis point rate cut. This move would likely compress yields on money market funds and short-term Treasuries, making the double-digit, tax-efficient yields of index-option ETFs significantly more attractive. The next critical data point for income architects will be the January 2026 ‘Dot Plot’ update, which will reveal the committee’s long-term terminal rate expectations and dictate the volatility regime for the first quarter of the new year.
