Earlier this week, I banked $4600 with ETF Covered Calls and I’ve been asked how I pick my ETFs for covered call writing. It’s pretty simple, the ETF-Cashinator does most of the work as it scans all ETFs with my special criteria and spits them out in order of highest return possibilities. I look at the top 10 then start my research.
The ETF picks have been fairly consistent and the returns have been quite acceptable to me. Because a few people have asked some questions I figured it was time to go through ETF Covered Call writing 101 again so here it is…..
What is an ETF?
An ETF is similar to a mutual fund, both of these are instruments that hold a basket of stocks. The type of stocks these mutual funds/ETFs hold depends on their creators philosophy and investment management style.
Why do you love ETFs vs. Individual Stocks?
This is the easiest question for me to answer. I initially started trading individual stocks and even moved on to covered calls on individual stocks but the same awful thing kept happening – losses! My losses were almost always exclusively caused the same thing over and over again -fraudulent information! I owned Worldcom, did my research but the company ended up filing for bankruptcy because of fraud. Remember Enron? I can name a dozen other companies that went bankrupt during the dot com boom too where I took some losses all because of some type of fraud or gross mismanagement.
The alternative to individual stocks were pretty slim; the key alternative in the past were mutual funds. High fees, hidden and mysterious stock ownership in the funds along with questionable conflicts of interest by some fund companies kept me clear of mutual funds. The worst part though was lack of options trading – you could never buy puts on a mutual fund or sell calls for additional income.
ETFs jumped into the picture to give us the best of both worlds as they provided the”safety” of a basket of stocks along with the ability to trade options (note: not all ETFs trade options). With ETFs you could buy downside protection if your research shows the markets aren’t going to do well in the future. Heck, you could even profit by buying long and selling short (ETF Covered Calls).
ETFs have become more sophisticated in recent years allowing you to leverage upwardly or downwardly so you can build a truly wildly diverse portfolio.
What about diversification?
This is perhaps the most amazing thing about ETFs! There are now ETFs that can provide exposure to investments that mutual funds couldn’t even dream of such as commodities, precious metals, currencies, international exchanges, energy, real estate, and a whole lot more! ETFs allow you to truly diversify into hundreds of investment vehicles!
Where can I get a list of all these ETFs that have options? Which are your favorite?
My favorite ETFs can be found here and you can find a list of others here but I believe the ETFs I’ve selected are the optimal ones for ETF Covered Call writing since they are within the following parameters: 100k or more of average daily volume, options market, ETF from major market maker. Of course, you must do your own due diligence and make your own determination. The cheat sheet in the first link also includes my favorite leveraged and shorting ETFs.
What is the downside here?
The downside depends on your investment perspective, clearly when you have more choices in an investment you will need to do some research to decide where, how and when you want to invest in a particular ETF. If you think the market will drop, then a shorting ETF might be what you want, if you think the market will rally over the long term then perhaps a leveraged 2x index ETF might be the right for you. If you want to be a long term investor but profit from short dips, then perhaps ETF Covered Calls will work for you. The downside is that you MUST DO YOUR OWN DUE DILIGENCE and appropriately invest your money at your risk comfort level.
If you are a person that prefers to never think about an investment then this type of investment vehicle might not work for you. You might be better off with a lifestyle fund that might get you some safe, predictable returns over the long haul.
How do I make a lot of money with no risk?
If you find that out, please let me know. I believe there is risk in everything we do but to put it in perspective, people lost their life savings in companies like Enron, Worldcom, and various market crashes over the decades. There are many people who are losing their homes right now in the subprime mortgage mess so even a “safe” investment can go sour anytime. I am a strong advocate of ETF Covered calls because it provides some diversification (a basket of stocks), the ability to take risks (options trading), the ability to “insure” your investment (put buying) and the ability to move instantly into cash whenever you want.
Where do I learn more?
I have a few examples of covered call writing with your online brokerage account here. This basically describes the “mechanics” of how to execute a buy/write trade or sell calls on ETFs you may already own. The most difficult thing, in my opinion, is getting over your fear. If it helps to conquer any fears, call a broker and have him/her walk you through the transaction or better yet, have them do it for you. The brokers will usually charge extra for taking an order over the phone but after you do two or three trades and are pleased with the results, you’ll quickly find that there’s no point for the middle man to be taking a big cut of your profits.
Are you a Professional Trader, Broker, CPA, CFP?
No! I am not a professional trader, nor a financial adviser or insurance salesman and I do not offer or sell any type of investment advice. I am a private citizen expressing myself through my constitutionally protected right of free speech. What you read here is NOT advice for you to go out and buy or invest in anything. Consult a professional and do your own due diligence before investing any money in any type of investment.