The Dow is up about 1500 points (13%) over the past year and at its high earlier this month, the index was up over 2000 points. The NASDAQ is up around 20% over the past year. These are delicious results and it would be nice if the next 52 weeks were guaranteed to be as prosperous.
An audio podcast of this article is available at: poweropt.com/podcasts/2007_10_23_ETFIndex.mp3
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A great way to make money during a slight downturn or market stagnation is by using covered calls. Of course the downside is if the market goes on a tear, a covered cal investment may not reap the full benefits of the gains. A covered call on an index like the S&P 500 itself is a good strategy, but the S&P 500 costs around $1500 per share; this leaves it out of reach for the average investor’s budget. Writing a covered call on an ETF tracking the index allows the average investor an easy alternative to this strategy while still maintaining the downside protection of a covered call.A covered call position on an index tracking ETF will cost less overall per trade, Diamond’s Dow Jones Industrial Average tracking ETF (DIA) is trading at $136.32, Powershares’ NASDAQ 100 tracking ETF (QQQQ) is currently trading for $54.18, and the Fidelity NASDAQ Composite Index ETF (ONEQ) is currently trading at $109.85.
In this blog we will look at some of the optionable index tracking ETFs and possible covered call investment strategies and how they might be employed. First let’s draw up a short list of the index tracking ETFs and their current prices.
|INDEX Tracking ETFs|
|Fidelity NASDAQ Composite Index||ONEQ||$109.85|
|iShares Russell 1000||IWB||$82.67|
|iShares Russell 2000||IWM||$81.38|
|iShares Russell 3000||IWV||$87.77|
|iShares S&P 100 Index Fund||OEF||$71.08|
|iShares SmallCap 600 Index||IJR||$70.00|
|NASDAQ 100 Index Tracking Stock||QQQQ||$54.18|
|PowerShares Dynamic OTC Portfolio||PWO||$57.40|
|StreetTRACKS Dow Jones Global Titans Index||DGT||$80.53|
|Vanguard Total Market VIPERS||VTI||$150.80|
Once 100 shares of one of the above index funds are purchased, an investor can write call options against their shares. Once the investor exits the call position by purchasing call options or letting them expire worthless, the investor can write additional call options on the ETF. If the market explodes and gains 35% in a year, it may work out this covered call strategy will yield less than just buying the ETF outright. If, as is the case most years, the market loses or gains between -10% and 10% it is likely this covered call strategy will outperform the market. Although, it should be noted, this depends on volatility and the short term movement of the market. If the market looses 20% over 9 months and then gains it back in one month, the covered call strategy will underperform during that period.
The following trades we gathered by inserting the ticker symbols listed above into PowerOptions‘ SmartSearchXL covered call search engine. PowerOptions allows a user to first create a custom list of stocks using the create list feature at the bottom of the search screen. Once a list has been created, it can be filtered the same way a user would filter a broad market search.
|Covered Call Search|
|IWM||81.38 (+0.62)||IOWLE||07 DEC 83.0 (60)||2.59||78.79||3.2||3.3||5.3|
|IWM||81.38 (+0.62)||IOWLD||07 DEC 82.0 (60)||3.1||78.28||3.8||4||4.8|
|IWM||81.38 (+0.62)||IOWLC||07 DEC 81.0 (60)||3.7||77.68||4.5||4.3||4.3|
|IWM||81.38 (+0.62)||IOWLB||07 DEC 80.0 (60)||4.35||77.03||5.3||3.9||3.9|
|IJR||70.00 (+0.56)||JINLR||07 DEC 70.0 (60)||2.65||67.35||3.8||3.9||3.9|
|ONEQ||109.85 (+1.75)||ONQLF||07 DEC 110.0 (60)||3.8||106.05||3.5||3.6||3.7|
|QQQQ||54.18 (+1.11)||QQQLB||07 DEC 54.0 (60)||2.11||52.07||3.9||3.7||3.7|
|ONEQ||109.85 (+1.75)||ONQLE||07 DEC 109.0 (60)||4.4||105.45||4||3.4||3.4|
|IJR||70.00 (+0.56)||JINLQ||07 DEC 69.0 (60)||3.3||66.7||4.7||3.4||3.4|
|IWM||81.38 (+0.62)||IOWLA||07 DEC 79.0 (60)||5||76.38||6.1||3.4||3.4|
|DIA||136.42 (+0.97)||DAZLF||07 DEC 136.0 (60)||4.5||131.92||3.3||3.1||3.1|
|IWB||82.67 (+0.58)||IBWLD||07 DEC 82.0 (60)||3.1||79.57||3.7||3.1||3.1|
|IWM||81.38 (+0.62)||IOWLZ||07 DEC 78.0 (60)||5.75||75.63||7.1||3.1||3.1|
|QQQQ||54.18 (+1.11)||QQQLA||07 DEC 53.0 (60)||2.78||51.4||5.1||3.1||3.1|
|ONEQ||109.85 (+1.75)||ONQLD||07 DEC 108.0 (60)||5.1||104.75||4.6||3.1||3.1|
For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions‘ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.
[tags] DIA, DIAMONDS HOLDRs Trust ETF, ONEQ, Fidelity Nasdaq Composite Tracking ETF, QQQQ, PowerShares QQQ Trust ETF, covered call investment strategy, investment strategy, poweroptions [/tags]