ETF Covered Calls 02-22-2008

Plenty of money to be made out there…..

Here are this weeks ETF-Cashinator picks:

2008_0222.png  2008_0222puts.png

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ETF Covered Calls.
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15 Responses to ETF Covered Calls 02-22-2008

  1. welldawg08 says:

    Stumbled upon your site, I’m very impressed. I hope you continue to produce the ETF Cashinator & Putinator reports. Do you use proprietary software to generate these screens?

  2. RichSlick says:

    Not really, it’s database application that I hacked together from bits and pieces. I’ve been trying to build a new one entirely web based but the one I have works so well I haven’t been too motivated to do it.

  3. welldawg08 says:

    What about the downside risk to hedging your positions? For example in your prior post you wrote “Bought 200 DDM @ $72.30 and Sold 2 DDMCT @ $3.60. If I get called I’ll lose about $0.30 per share as I sold the $72 strikes but I’m willing to take the risk. I’ll earn 4.98% (if not called) or 4.56% (if called) in 31 days.” What if DDM drops to $68? Your return would be ((68-72.3)*200)+ (200*3.6)= -$140. How are you factoring potential price drops on your positions when you are writing covered calls?

  4. welldawg08 says:

    Also have you ever thought about “selling to close” your written options when the underlying stock price rises? For example, referring to your DDM position, as of Feb. 27 DDM is at $76.94 and DDMCT is at $6.00. You could sell your prior written call for a nice gain of (200*(6.00-3.60)=+$480 and then sell the stock for a gain of (200*(76.94-72.30)=+$928. Your total ROI would be (480+928)/(72.30*200)=9.7%

  5. RichSlick says:

    DDM is Double Dow (Long) so if DDM were to drop to $68, I hold on to the shares until they’re profitable again.

    Look at the arbitrage account, I’ve been “saddled” with OIH for a few months but I’m bullish (and have been) on energy so it’s kicking back up to where I expect it. Guess what, I’ll be selling calls as soon as it gets close to $185 or above.

    I could have bought puts but that eats into the profits.

    As for “selling too close” that’s the whole point. In an ideal world, I’d like to be CALLED each and every time because my goal is to make 2% to 3% EVERY month! That translates into 24% to 36% returns PER YEAR.

    It’s impossible to predict whether DDM or DXD will rise or fall so I calculate everything around making 2% every month. If I can achieve that consistently (which I have) then I’ll beat every index out there consistently without too much trouble as it’s all pretty automated at this point.

    Price drops are factored in by this system having a long time horizon and strategically selecting key ETFs with high volume on shares traded and options market along with factoring in current news, world events, interest rates, bond rates, consumer sentiment and other factors.

    The stock markets moves up & down, I try to profit 2% each month with those moves.

  6. RichSlick says:

    I forgot to add that there is no emotion here with my strategy. With DDM as an example, I’ve pocketed ~ 4% and I’m not emotionally tied to wanting it to go up or down, I’ve “banked” the profits in my account. If DDM skyrockets to $100 then I’ll miss out, no big deal. If DDM drops to $60 then I’m at a technical loss but it will eventually recover at some point in the future otherwise we’re in a great depression and it won’t matter much anyway right?

    So if I can make 4% over the next 12 months then I’ve made 48% for the year!

  7. welldawg08 says:

    So correct me if I am wrong, but:
    1) You are not concerned w/ the price of the underlying ETF, as there is no way to predict future price movements, and therefore are not emotionally tied to it

    2) Every month (using the ETF Cashinator & Putinator analysis) you essentially write a covered call on an ETF which yields an average ROI of 2-4%, regardless of how the ETF performed since the last written call

    3) Wash, rinse & repeat

  8. welldawg08 says:

    Also the $ u gain from writing a call will offset any decline in value of your position in the underlying ETF, so esentially you are hedging your downside.

  9. RichSlick says:

    That’s pretty much it but I would caution against simply looking at the highest yielding ETF and assume it won’t drop dramatically. A sensible approach, research and your attitude about what is a good investment vs. bad one goes a long way.

    For the past two years, I’ve circled around a few key ETFs which I have been bullish on: SMH, OIH, EEB, PGJ. They’ve all been profitable to date.

    I’m now experimenting with DXD and DDM because I think we’ll be stagnant until US elections are over in November but I could be wrong ;) .

  10. welldawg08 says:

    I noticed OIH yields a dividend ($10.43 in Dec. 07!). This has added value b/c in addition to the buy/write strategy, you would also collect dividends if never called, which would help offset any drops in the ETF’s price.

    As far as the Nov. elections, I bearish against the market if a Democrat gets elected.

  11. RichSlick says:

    OIH should have a dividend on 2/28/08. Not sure how much will be paid out.

    I don’t think it matters much who wins in November, the change will be good in the long run but that’s a whole other discussion.

  12. welldawg08 says:

    What are your thoughts on the following trades I made:

    1) 2/27 Long 300 SSO @ 73.7/share (-$21,982.70)

    2) 2/27 Sell to Open 3 contracts March 08 $74.00 Call @ 2.25 ($685.76)

    3) 2/29 Buy to Close 3 contracts March 08 $74.00 Call @ 0.95 (-$285.00)

    4) 2/29 Sell to Open 3 contracts March 08 $69.00 Call @ ~2.80 ($805.00)

    Today SSO is at $68.05, rendering my long position @ $20,415, or a loss of -$1,567.7.

    From selling & then buying back my Mar 08 $74.00 calls yielded me a profit of $400. Plus combined with selling Mar 08 $69.00 calls currently yields me total profit of $1,205, or a total net loss on my long SSO position of $362.7.

    Hedging my position has resulted in me losing only $362.7 vs. $1,567 if I had only bought the stock.

  13. The Travelin' Man says:


    While this is Rich Slick’s domain far more than my own, I will chime in with a little bit of my own experiences.

    First, I am one who has learned to let the option pretty much play through to the end, unless the most extreme of circumstances. If I am not mistaken, Slick rarely buys back his sold covers prior to expiration (it happens…but rarely). The idea is that if you are happy with the trade you made on the day you made it, then you should likely let it play out. By rolling your option down, you capped your profit in the event that the stock does recover – and since it is a double-up proposition, the swings are exaggerated – and boosted by this turmoil and volatility. I tried buying and selling some options on SMH last month, and I would have done much better if I just let them play out to the end initially.

    Second, as Slick stated above, it is not just about picking the highest yielding ETF each time you choose to buy/write. If that’s the case, you only have to track XHB, because that has consistently been the highest yield in the last few months. The problem with doing that is that you then have to own XHB and ride along with that roller coaster. It may be for you – it may not. So, when you buy SSO, you need to (well, you should, anyway) believe that the market is going to go up over the period of time that you own it. So where you question whether Slick chooses stock with “emotion” – just because he says that he doesn’t care about the underlying stock/ETF, it doesn’t mean that he wouldn’t want to own it – at the price purchased – regardless of the situation with the option.

    I think I have that right, no, Slick?

  14. RichSlick says:

    It’s interesting. It’s funny you just wrote that because I nearly closed out my calls on DXD because the market had rallied and I just *knew* it was going to drop today but I didn’t budge.

    I guess the concern I have is why you sold the $69 calls because if it pops up to $80 then you’ll get called out at $69 and you bought at $73.70!

    I don’t get to watch the market every day so I don’t buy/sell calls daily and prefer to set my clock to every 30 day expiry cycle.

  15. RichSlick says:

    Travelin’ Man,

    You and I must have been writing at the exact same time. You pretty much hit the nail on the head.
    In my experience, buying and selling doesn’t always pan out but with the ever increasing volatility it may for the next few months. I rarely buy back my options, although I do get mighty tempted!
    One key point Travelin’ man that you made and I agree with but forgot to mention is that the ETF you buy/write with YOU MUST BE WILLING TO OWN OVER THE LONG RUN!

    That last statement is critically important because if you get into a mode of simply buying/writing ETFs you’ll eventually get yourself into a lot of trouble and losses.

    XHB & FXI have been the perfect example. Those two ETFs have been consistently high every month but in the case of XHB it would have been a disaster to buy at $45 two years ago, sell calls and average your way down to $20 today. FXI has been similar. You would have raked in cash but the downward death spiral would have been brutal. Having said that, XHB *might* have bottomed out and I’ve been VERY close to buy/writing on it and it may be an ETF I would like to own/earn in the long run at this price level but there are too many better opportunities right now that I’ve held back – I’ve only got so much cash to play with…..

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