ETFs and Covered Calls

ETFs and covered calls can be a great combination at times. It kind of seems like they were made for each other because ETFs have the following characteristics.

1. Not go to Zero

I have never seen an ETF go to zero before because it is just a combination of different stocks. For it to go to zero every stock that the ETF holds would have to go under. That isn’t saying that there is no way an EFT can go to zero, but it is pretty unlikely.

That makes it a good candidate if you want to hold onto it for a while and sell covered calls on it. At least you know it will still be around in 5 years.

2. Not Big Movers

Of course stocks that make big moves can be very profitable. But they can also be very painful if you it goes against you. ETFs on the other hand are normally more stable because they track a group of stocks.

Stable range bound stocks are perfect for covered calls because you do not make money by the appreciation of the stock, but by selling covered calls on the stock.

3. Many Offer Options

Many ETFs do offer options to sell which of course is critical if you want to sell a covered call on it. But it is important to remember that not all ETFs do. So before you enter a covered calls trade you want to make sure that the equity has calls which you can sell.

Not everyone likes the ideas of covered calls, but during sideways or up trending markets it can be very profitable.

For more on ETFs visit http://www.stocks-simplified.com/What_Are_ETFs.html

For more on covered calls visit http://www.stocks-simplified.com/covered_calls.html