Marco Hickey's  Instablog

As promised in my previous post Why I Sell Put Options Instead of Setting Limit and Market Orders Part I, where I shared why I never set these types of orders and my reasoning, this is part 2 where I'm going to show you the benefit of writing naked put options on 40 popular leveraged ETF's. 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.

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