The covered call investing stock option strategy is considered a neutral-to-bullish stock option investing strategy. However, with the fairly recent of appearance of short and ultra-short Exchange Traded Funds (ETFs) on the stock option investing radar, covered calls can also be used for potentially generating income in bearish markets.
In turbulent or downward-trending markets, short and ultra-short ETFs offer investors a way to hedge their bets, protect their overall portfolios or generate income with covered calls. But these funds aren’t for novices, and it’s important to understand how they work before venturing into the world of short trading through ETFs.
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ETFs are securities that are grouped together and traded on exchanges just like stocks. Because they are collections of securities, however, they behave more like index mutual funds than they do individual stocks, and they are somewhat less risky than stocks, as well.
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ETFs generally have lower fees than mutual funds, but that doesn’t necessarily mean they’re a better deal, since they often they make up for it with their commissions. Because they’re traded like stocks, you must pay commissions each time you buy or sell shares of an ETF.
Another benefit of ETFs is that you can trade in and out of them throughout a day’s trading period. Mutual funds, on the other hand, are somewhat more cumbersome and aren’t as readily tradable. This benefit can be a detriment, however, particularly for investors who are tempted to make multiple trades over the course of a day without a strategy. You’ll need to make sure, in other words, you’re as disciplined with ETFs as you would be with individual stocks.
Recent additions to the ETF family, short and ultra-short ETFs allow traders to short sell these fund-like collections of securities. Short ETFs, basically, create “inverse returns,” meaning they go against the general trend of the market. Ultra-short ETFs are similar, except they move in the inverse direction with twice the momentum of short ETFs, thus providing extra protection in sharp, fast downturns in the market.
Here’s how they work. When the market goes down, short ETFs go up. Likewise, if the market goes up, short ETFs go down. And unlike short selling stocks, shorting with ETFs typically limits your losses to the amount invested and commissions.
Short and ultra-short ETFs include both broad stock groupings that follow an index just like an index mutual fund, as well as industry-specific groupings that inversely track the movement of just a part of the market.
Using PowerOptions powerful stock options search engine with a Simple Moving Average (SMA) technical search parameter set for SMA20>SMA200 and the search universe set for Short ETFs, a covered call investing strategy for short and ultra-short ETFs starting in December of 2007 returned a whopping 27.6% – just eight months. Over the same time period, the S&P500 index experienced a loss of -16%. A table of the results of the short/ultra-short covered calls ETF strategy is shown below.
| Covered Call Investing with Short and Ultra-short ETFs | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Month/Year Entered |
Month/Year Exited |
%Return | Successful/ Total |
Short/Ultra-short ETF Ticker |
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| Dec 2007 | Jan 2008 | 6.6% | 2/2 | SKF, SDS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Jan 2008 | Feb 2008 | 7.3% | 1/1 | QID | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Feb 2008 | Mar 2008 | 5.4% | 5/5 | SKF, TWM, QID, DXD, SDS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mar 2008 | Apr 2008 | 0.0% | 1/4 | SKF, SDS, QID, DXD | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Apr 2008 | May 2008 | -2.4% | 2/5 | TWM, SKF, QID, SDS, DXD | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| May 2008 | June 2008 | 8.1% | 1/1 | SKF | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 2008 | July 2008 | 4.4% | 2/2 | SDS, DXD | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| July 2008 | Aug 2008 | -1.8% | 3/8 | TWM, SDS, DXD, SKF, SRS, EEV, FXP, QID |
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| 27.6% | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
PowerOptions provides the capability to find potential income generating stock options investments in any type of market: bearish, bullish and neutral.
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.
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[tags] ETF, Short ETF, Ultra-short ETF, mutual fund, SMA, Simple Moving Average, covered call investing, covered call investment strategy, investment strategy, iron condor, option investing, poweroptions, stock option strategy, stock option trading, stock options [/tags]