The after-tax lens

Premium income is taxed at your worst rate

Buy-and-hold investors defer tax for decades and then pay long-term rates. Income sellers pay every year, at the top of the schedule, forever.

Option premium on single stocks and most ETFs is generally taxed as a short-term gain: your ordinary-income rate, plus state tax, plus — for higher earners — the net investment income surtax. A yield that looks generous pre-tax can lose a third of itself or more before it reaches you.

This is the quiet reason so many income strategies disappoint in practice. The brochure shows the pre-tax number, the strategy delivers the pre-tax number, and the investor receives something noticeably smaller.

A pre-tax ranking of income trades is not a ranking of income trades. It is a ranking of gross revenue.

The index-option exception: Section 1256

Broad-based index options — XSP, for instance — fall under IRS Section 1256. Gains are treated as 60% long-term and 40% short-term regardless of how long you held them. For most tax situations that blended rate lands meaningfully below the straight short-term rate.

It is a structural advantage written into the tax code, available to anyone, and routinely ignored because it never appears in a pre-tax screen. When the engine ranks an index trade above an economically similar single-stock trade, this is frequently the whole reason.

Two practical bonuses come along with it: index options like XSP are cash-settled and European-style, so no shares change hands and there is no early assignment into stock. Section 1256 positions are also marked to market at year end, which cuts both ways — you can owe tax on an open position, so the timing benefit is not free either.

Covered-call sellers have two extra traps

• Assignment realizes your gains. If a call on low-cost-basis shares is assigned, you sell those shares — and owe tax on the entire embedded gain, not just this month’s premium. On a long-held winner that bill can dwarf every credit you have ever collected on the position. The engine folds expected assignment tax into each covered call’s net-vs-hold verdict.
• The wrong call can undo your holding period. Writing a call that sits too deep in the money can fail the IRS’s qualified covered call test and suspend the shares’ long-term holding-period clock — quietly converting a would-be long-term gain back into a short-term one. The app flags calls that risk this before you write them.

Why ranking after tax changes the answer

The app converts every candidate into an after-tax annualized return on the capital committed, using the rates you set in Tax Settings. That single lens is what makes a covered call, a cash-secured put and an index overlay comparable at all — they commit different capital, over different horizons, taxed differently.

It reshuffles the leaderboard more often than you would expect. The trade with the biggest credit frequently is not the trade that leaves you the most money, and the gap widens the higher your bracket and the higher your state tax.