Marco Hickey's  Instablog

As posted previously in my blog, ETF's are some of the safest securities to purchase when planning on investing. An even more conservative way to invest with ETF’s 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 ETF's. This is because diversified ETF's are less volatile than purchasing specific stocks (however leveraged ETF's are extremely volatile and click here to see why I don't believe they are investment vehicles).

Below is a list of 60 ETF's 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 (July18, 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).

The table above allows you to see which ETF's (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 ETF's I'll be buying to write out immediately. As a high risk investor, from this table I am most interested in the following ETF's: 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 ETF's (two of the three leveraged) have higher than average returns, and probabilities (of the 60 ETF's analyzed).

When writing in the money calls for expirations greater than 30 days, I usually use ETF's. This is because they are less volatile (on average) than individual stocks. As you can see from the table above, some ETF's 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 ETF's, 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 ETF's by return % and % probability. For spreadsheets of these ETF's 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