ETF Covered Calls 09-05-08

It’s been a very volatile  week and will likely continue on to next week with what I’m seeing on the ETF-Cashinator.  Here are this weeks ETF-Cashinator picks…

 2008_0905.png  2008_0905b.png  2008_0905puts.png  

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8 Responses to ETF Covered Calls 09-05-08

  1. Rick says:

    What do the green and orange highlights mean?

  2. RichSlick says:

    The green mean that the ETF Covered Call is yielding > 3%

    The orange mean that the ETF Naked Put is yielding > 3%

    If you could earn 3% monthly, then that would translate into a 36% annual return. Unfortunately, 36% doesn’t always happen, I’ve been averaging about 20%.

  3. Mark says:

    I have been struggling with the SMH’s. I bought at $32 and I am having a hard time determining which call to sell since it is floating around $27. I noticed that you had a similar experience with the XHB. How do you decide which call to sell so you don’t get called out and lose money?


  4. RichSlick says:

    You bought SMH at $32, did you immediately sell calls? If so what did you sell?

    There are basically three options:

    1. Buy more SMH and sell more calls. You could buy at $26.55 and sell October $27 strikes for about $1.00 which is 3% in about 40 or so days.

    2. Sell SMH calls far out like Feb 09 which would yield very low.

    3. Wait. This is perhaps the hardest to do because there are always opportunities out their yielding 3% or so and it’s painful having to wait it out but that’s what you gotta do sometimes. It helps when you don’t put all your “eggs” in one basket (e.g. ETF). I own DDM, SSO, XHB, SDS, and QID at various price points to mitigate losses and long term, the market will turn up. SMH will eventually recover, it may take 5 days, 5 weeks, 5 months or 5 years, in the interim you can take a loss and make it up with other investments or wait.

    I will add that this is the craziest market I’ve seen in my life. The Dow shoots up 300 points one day and drops 300 the next. It’s totally crazy but I think things will work out long term.

  5. Mark says:

    I did sell a $1.13 May call which expired worthless and then another Nov call for $1.50 which I paniced and bought back too early at .58 at the end of August. I guess I am going to have to wait until I can sell a call around $30 to not loose my shorts. I am finding out that the SMH’s might not be a good candidate for covered calls.

  6. RichSlick says:

    I had a good run with SMH a while ago. The key to ETF Covered Call trading is to understand the sector rotation and arbitrage opportunity when ETFs are heavily discounted or heavily overbought.

    Right now UYG, GDX and XHB are severely discounted. Oddly enough, SMH is also severely discounted now at $26.

    Generally speaking, you need to look at the 52 week high/low of an ETF and target an ETF that is about 10% to 15% above its 52 week low.

    In the case of SMH, the 52 week low was $25.87 which means the 10% time I would have bought would be $28.46 and sell $28 or $29 calls.

    You generally need to understand what is going on in the semiconductor industry and general economy to determine whether this is a sector you want to get into.

  7. The Travelin' Man says:

    This conversation is funny to me. I think that SMH is the only ETF covered call on which I lost (a little) money. It wasn’t bad, but I did something similar to Mark – I panicked and bought back my call when things went up and then sold again, and then had something expire worthless, and then sold a call for a lower dollar amount. Ugh! It was all a learning process, though, and now I pretty much let calls play out if I can. I would have done better if I just stood pat from Day One and not tried to play things!

    Speaking of….when do you plan on jumping in the UYG pool with me, Slick? ;-) It has been a little bit of a roller coaster this month, but I like where things are now – with about 10 days to go. The “craziest market” you’ve seen has had quite an effect on this particular fund. I know you have been tracking it, too. I bet the chart must look like an EKG, not an ETF!

  8. RichSlick says:

    I had planned on selling Naked Puts when UYG got down to $18 or $19 but I missed the opportunity so now I’m waiting. What keeps me waiting is the US buying up Freddie and Fannie.

    People might panic later this week and send UYG down hard or “the worst is over” sentiment might spread like wildfire and UYG will rocket.

    WM (Wamu) looks really bad today and if the stock keeps going down it may end up on the FDIC Friday festival and that could lead to more panic.

    It’s just totally crazy! I’m willing to take on risks for big gains but I’m no kamakazi investor!

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