Seeking Alpha
Profile| Send Message|
( followers)  

As promised in my previous post, Why I Sell Put Options (Part I), in which I shared why I never set these types of orders and my reasoning, here is Part II. In this post I will show you the benefit of writing naked put options on 40 popular leveraged ETFs. To understand this post you'll need somewhat of a background in stock options. To learn more about options and, how options can help protect your portfolio, and allow you to speculate with less money up front click here.

If you're finding this post for the first time and don't know the benefits of selling put options compared to setting market and limit orders, you may find it valuable to read Part I. If you're following up Part I, you'll notice writing naked puts on these leveraged ETF's bring much greater premiums.

All data as of market close Monday July 20, 2009.

HOW TO READ THE TABLE

NOTE: When using this strategy, I first decide what I am willing to pay for the ETF. Let's keep it simple and say I'm willing to buy the ETF at a price of 5% lower.

Abbreviations used in table:

  • Price: The most recent closing price (last quote price) for the ETF
  • 5%: The price which I am willing to pay for the ETF which is 5% lower than the closing price
  • Strike: The closest contract strike price to the 5% lower price. It may be slightly higher or slightly lower than the 5% lower price.
  • Prem.: This is the theoretical premium received from selling the put option
  • Adj. Cost: This is the adjusted cost for the ETF, if you do happen to end up with the shares at expiration.

The first ETF listed in the table below is the Direxion Daily Financial Bear 3X (FAZ). An example of this option strategy on the FAZ would be interpreted as:

Sell the Direxion Financial Bear (FAZ) August 39 put option. This will give you $3 a share or $300 per contract. If FAZ expires above the indicated strike price, you profit 100% of the premium received, if not your cost per share of the stock is $36, 12.2% lower than the close price and 7.7% lower than the price I was willing to pay with a limit order.

ETF Ticker Price 5% Strike Prem. Adj. Cost
Direxion Daily Finan. Bear 3X Shs(ETF) FAZ 41.01 38.96 39 3 36
Direxion Daily Finan. Bull 3X Shs(ETF) FAS 49 46.55 46 3.4 42.6
Direxion Daily Energy Bull 3X Shs(ETF) ERX 30.7 29.17 29 2.05 26.95
Direxion Daily Energy Bear 3X Shs(ETF) ERY 20.34 19.32 19 1.3 17.7
ProShares UltraShort Basic Materls (ETF) SMN 16.97 16.12 16 1.05 14.95
Direxion Daily Small Cp Bull 3X Shs(ETF) TNA 30.26 28.75 28 1.75 26.25
ProShares UltraShort DJ-UBS Crude Oi ETF SCO 19.41 18.44 18 1.08 16.92
ProShares Ultra DJ-UBS Crude Oil(ETF) UCO 11.05 10.50 10 0.6 9.4
ProShares Ultra Financials (ETF) UYG 4.09 3.89 4 0.22 3.78
ProShares UltraShort Real Estate (ETF) SRS 18.07 17.17 17 0.95 16.05
Direxion Daily Large Cp Bull 3X Shs(ETF) BGU 37.1 35.25 35 1.95 33.05
Direxion Daily Tech Bull 3x Shs (ETF) TYH 107.38 102.01 100 5.25 94.75
ProShares Ultra Industrials (ETF) UXI 21.05 20.00 20 0.93 19.07
Direxion Daily Large Cp Bear 3X Shs(ETF) BGZ 31.24 29.68 29 1.38 27.62
ProShares Ultra Oil & Gas (ETF) DIG 27.34 25.97 26 1.1 24.9
ProShares UltraShort Oil & Gas (ETF) DUG 17.87 16.98 17 0.7 16.3
Direxion Daily Small Cp Bear 3X Shs(ETF) TZA 19.78 18.79 17.5 0.77 16.73
ProShares Ultra Technology (ETF) ROM 36.3 34.49 35 1.38 33.62
ProShares UltraShort Financials (ETF) SKF 38.73 36.79 36 1.45 34.55
DIREXION DAILY 30Y T TMF 37.57 35.69 35 1.4 33.6
ProShares UltraShort Semiconductors(ETF) SSG 27.47 26.10 25 1.02 23.98
ProShares Ultra Semiconductors (ETF) USD 24.85 23.61 22.5 0.9 21.6
ProShares UltraShort Russell2000 (ETF) TWM 39.29 37.33 37 1.42 35.58
ProShares Ultra Russell2000 (ETF) UWM 20.41 19.39 19 0.73 18.27
ProShares Ultra Basic Materials (ETF) UYM 19.81 18.82 17.5 0.68 16.82
ProShares Ultra QQQ (ETF) QLD 41.26 39.20 39 1.3 37.7
ProShares Ultra S&P500 (ETF) SSO 27.77 26.38 26 0.8 25.2
DIREXION DAILY 30Y B TMV 82.9 78.76 75 2.3 72.7
Direxion Daily Dpd Mkts Bear 3x Shs(ETF) DPK 27.71 26.32 25 0.75 24.25
ProShares Ultra Dow30 (ETF) DDM 31.31 29.74 29 0.7 28.3
Direxion Daily Tech Bear 3x Shs(ETF) TYP 17.19 16.33 15 0.38 14.62
ProShares Ultra Real Estate (ETF) URE 3.69 3.51 3 0.08 2.92
ProShares Ultra Gold (ETF) UGL 34.8 33.06 33 0.75 32.25
ProShares UltraShort S&P500 (ETF) SDS 51.24 48.68 48 1.1 46.9
ProShares UltraShort Dow30 (ETF) DXD 43.41 41.24 41 0.93 40.07
ProShares UltraShort QQQ (ETF) QID 29.15 27.69 27 0.6 26.4
ProShares UltraShort Industrials (ETF) SIJ 39.4 37.43 35 0.77 34.23
DIREXION DAILY 10-YE TYD 48.38 45.96 45 0.85 44.15
DIREXION 10Y BEAR TYO 70.64 67.11 65 0.82 64.18
ProShares UltraShort Gold (ETF) GLL 14.5 13.78 13 0.13 12.87

All of these options expire on August 22; therefore the last trading day is Friday, August 21, 2009.

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

I've been using this strategy to purchase my shares and I find it has been working well. It's a bad idea to use this strategy as a form of speculation, in other words selling a put for the premium just because you think a stock will never get to a lower strike by options expiration. Remember even if the stock goes to $0 a share, you're still obligated to buy it for the indicated strike. To learn more about selling puts and other option strategies check out my option trading books.

Disclosure: Long BGZ, FAS, FAZ, TNA, UCO, URE

Source: Why I Sell Put Options (Part II)