As posted previously in my blog, ETFs are some of the safest securities to purchase when planning on investing. An even more conservative way to invest with ETFs is to write covered calls on them once purchased. Writing call options allows you to get some of your investment back immediately (gives you some downside protection), however if the stock takes off you cap your upside.
The buy/write option strategy seems ideal when purchasing diversified ETFs. This is because diversified ETFs are less volatile than purchasing specific stocks (however leveraged ETFs are extremely volatile and click here to see why I don't believe they are investment vehicles).
Below is a list of 60 ETFs and their % probability (risk-neutral) of expiring above the indicated strike, as well as the % return if they expire above the indicated strike. The list below is sorted alphabetically, and all options are for the July expiration (July 18, 2009). Every strike price is near the money unless indicated in the money (denoted by IN $).
(All option data priced as of pre-market Friday June 5, 2009).
|Stock||Ticker||Strike||% Probability||% Return|
|Consumer Discret Select Sector SPDR||XLY||24||54.2||3.9||IN $|
|Consumer Staples Select Sector SPDR||XLP||24||42||2.7|
|DIAMONDS Trust, Series 1||DIA||88||47.8||3.5|
|Direxion Daily 10 Yr Trsy Bull 3X Shares||TYD||50||68||2.6|
|Direxion Daily 30 Yr Trsy Bull 3X Shares||TMF||40||42.3||16.9|
|Direxion Daily Devlpd Mrkts Bull 3X Shrs||DZK||55||59.1||9.7||IN $|
|Direxion Daily Energy Bull 3X Shares||ERX||40||48||16.4|
|Direxion Daily Financial Bear 3X Shares||FAZ||5||49.1||27.7|
|Direxion Daily Financial Bull 3X Shares||FAS||10||62.8||12.9|
|Direxion Daily Large Cap Bear 3X Shares||BGZ||35||49.3||13.9|
|Direxion Daily Large Cap Bull 3X Shares||BGU||35||62.4||8.6||IN $|
|Direxion Daily Small Cap Bear 3X Shares||TZA||22.5||46.9||20.3|
|Direxion Daily Small Cap Bull 3X Shares||TNA||32||56.6||12.8|
|Direxion Daily Technology Bull 3X Shares||TYH||85||61.4||8.2||IN $|
|Energy Select Sector SPDR||XLE||53||48.8||5|
|Financial Select Sector SPDR||XLF||12||61||4.7||IN $|
|Industrial Select Sector SPDR||XLI||23||59.2||3.3||IN $|
|iShares Dow Jones US Energy||IYE||30||65.7||2.4||IN $|
|iShares Dow Jones US Real Estate||IYR||35||54.9||5.5||IN $|
|iShares MSCI EAFE Index||EFA||48||50.2||3.5|
|iShares Russell 2000 Growth Index||IWO||59||48.7||4.6|
|iShares Russell Midcap Growth Index||IWP||35||73.1||0.85||IN $|
|iShares Russell Midcap Index||IWR||65||65.7||2.1||IN $|
|iShares S&P 100 Index||OEF||44||50.3||3.2|
|iShares S&P 500 Index||IVV||95||49.9||3.4|
|iShares Silver Trust||SLV||15||64.5||3.8||IN $|
|Materials Select Sector SPDR||XLB||28||50||4.7|
|Retail HOLDRs||RTH||80||54.4||3.8||IN $|
|Short Dow30 ProShares||DOG||66||43.7||5.2|
|Short Financials ProShares||SEF||59||40.8||10.8|
|Short QQQ ProShares||PSQ||55||60.2||3||IN $|
|Short Russell2000 ProShares||RWM||55||51.7||5.3|
|Short S&P500 ProShares||SH||66||42||5.2|
|SPDR Gold Shares||GLD||97||49.2||4.2|
|SPDR S&P 500||SPY||95||48.9||3.7|
|SPDR S&P Metals & Mining||XME||40||53.4||8|
|SPDR S&P Retail||XRT||30||38.6||8.1|
|Technology Select Sector SPDR||XLK||18||56||3.3||IN $|
|Ultra Basic Materials ProShares||UYM||21||55.2||9.4||IN $|
|Ultra DJ-AIG Crude Oil ProShares||UCO||12.5||61.7||8.4||IN $|
|Ultra Dow30 ProShares||DDM||31||51.8||6.2|
|Ultra Financials ProShares||UYG||4||64.2||8.2||IN $|
|Ultra Gold ProShares||UGL||37||55.5||6.6||IN $|
|Ultra Industrials ProShares||UXI||22.5||72.5||8.5|
|Ultra Oil & Gas ProShares||DIG||31||54.8||8.2||IN $|
|Ultra QQQ ProShares||QLD||40||47.6||8.6|
|Ultra Real Estate ProShares||URE||4||61.7||9.7||IN $|
|Ultra Russell2000 ProShares||UWM||21||54.5||8.7||IN $|
|Ultra S&P500 ProShares||SSO||28||48.6||7.8|
|Ultra Semiconductor ProShares||USD||20||52||9.7|
|Ultra Technology ProShares||ROM||30||65.7||5.2||IN $|
|UltraShort Financials ProShares||SKF||42||48.2||15.1|
|UltraShort Oil & Gas ProShares||DUG||18||39.2||15.6|
|UltraShort QQQ ProShares||QID||34||41.4||12.9|
|UltraShort S&P500 ProShares||SDS||55||47.5||9.4|
|United States Natural Gas||UNG||15||50.4||11.4|
|United States Oil||USO||38||51.1||6.3|
|Utilities Select Sector SPDR||XLV||26||44.5||3.1|
The table above allows you to see which ETFs (out of my list of 60 chosen) have the best chances at the highest possible returns ("best bang for your buck"). I use this method to choose which ETFs I'll be buying to write out immediately. As a high risk investor, from this table I am most interested in the following ETFs: SPDR S&P Metals & Mining (XME), Direxion Daily Technology Bull 3X Shares (TYH), and the Direxion Daily Small Cap Bull 3X Shares (TNA). This is because all three of these ETFs (two of the three leveraged) have higher than average returns, and probabilities (of the 60 ETFs analyzed).
When writing in the money calls for expirations greater than 30 days, I usually use ETFs. This is because they are less volatile (on average) than individual stocks. As you can see from the table above, some ETFs written in the money will return a decent profit, while others return very high profit (considering the options expiration is 43 days away).
I like using this strategy especially with ETFs, because even if I'm not called out on the ETF (at expiration), I'll still have it to write out again at my desired strike price and date again for another premium. Check out my blog for more strategies like the ones mentioned above, options pricing, probabilities, and more.
Using this strategy during the months of September, October (2008) allowed me to protect my portfolio greatly, and I actually returned a profit in November (2008).
For your convenience I have ranked these 60 ETFs by return % and % probability. For spreadsheets of these ETFs listed in order from least to greatest % returns, least to greatest % probability of expiring above indicated strike, and the average for both click here.
Disclosure: Long DIG, SSO, UYG, FAS, FAZ, TNA, BGZ, UCO.