Sea Side Scrap Book » Best Emerging Markets And Gold ETFs For Selling Covered Calls

Best Emerging Markets And Gold ETFs For Selling Covered Calls

An exchange traded fund (ETF) is a collection of stocks that trades like a single stock. Many ETFs have options available so investors can use them to write covered calls. They make sense for covered calls because of the inherent diversification they provide (important for smaller accounts). Because of the way ETFs are constructed, there is no single stock risk. If one of the stocks that makes up the ETF drops suddenly then the effect will be felt less by the ETF that contains that stock than by the stock itself.

ETFs that track specific indexes allow you an easy way to trade the index. For example, the Russell 2000 index can be traded through the ETF with symbol IWM. There are 2000 stocks in IWM so by definition it has no single-stock risk. Other popular ETFs with many constituent components include SPY (S&P 500) and QQQQ (NASDAQ 100). Or, if you want something that follows specific sectors, countries, or commodities, you can do that with ETFs, too. For example, XLF tracks financial stocks, EWZ tracks Brazil, EWJ tracks Japan, and GLD tracks gold.

The ETF with symbol GLD is an important one given the interest in owning gold. However, GLD doesn’t pay a dividend. But, by using covered calls you can create dividend-like cash from gold, too. Just buy a gold ETF and write calls (in-the-money if you’re neutral to bearish on gold or out-of-the-money if you’re bullish on gold). GLD is by far the most liquid (meaning, most capital invested, and most highly traded) gold ETF and probably your best bet for covered call trading. Other ETF choices include DGL which has small open interest (not good), and UGL which is 2x leveraged and therefore quite volatile (not good).

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To be diversified you will want some emerging markets exposure in your portfolio. But given the challenge of finding reliable, solid information on companies in foreign countries, the safer way to play emerging markets is with a group of stocks in an ETF. The most popular emerging market ETF is EEM (iShares MSCI Emerging Markets Index Fund), which has over $39 billion in assets and is about as liquid as it gets. If you want to limit your exposure to just one country, say China for example, then you can use FXI (iShares FTSE/Xinhua China 25) to write calls against.

There is one kind of ETF that you should absolutely not get involved with for covered calls, and those are the leveraged ETFs. Leveraged ETFs are designed to be much more volatile than an unleveraged ETF. You can typically identify leveraged ETFs because they have words in their name like “double”, “ultra”, “triple”, “2x”, “3x”, or “leveraged”. Leveraged ETFs are mostly for day traders and are not appropriate for conservative income-oriented covered call investors. It can be tempting because the premiums are almost always pretty high. But there’s a reason for those fat premiums, so beware! Leveraged ETFs are, by design, two or three times more volatile than their unleveraged counterparts.

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