Best ETFs For Covered Calls On Emerging Markets And Gold

Exchange traded funds (ETFs) are collections of assets that trade like a single stock. The more popular ones are optionable (meaning there is a market for calls and puts on the ETF) so you can use them to sell covered calls. They make sense for covered call writers because of the built in diversification they provide (especially true in accounts that may not have the capital to buy many different stocks for diversification). There is no single-stock risk with an ETF. If one of the member stocks drops suddenly then the effect will be felt less by the exchange traded fund that contains that stock than by the single stock by itself.

Some ETFs track specific indexes, allowing a low-cost way to trade the index. For example, the symbol IWM represents an ETF that is comprised of two thousand stocks that make up the Russell 2000. When you buy IWM you are buying a collection of these 2000 stocks. Other popular ETFs include QQQQ (for the NASDAQ 100) and SPY (S&P 500). And there are ETFs to track countries, sectors, or commodities. For example, EWJ tracks Japan, EWZ tracks Brazil, XLF tracks financial stocks, and GLD tracks gold.

The ETF with symbol GLD is an important one given the interest in owning gold. However, GLD doesn't pay dividends. But, by using covered calls you can create dividend-like cash from gold, too. Just buy a gold ETF and write calls (in-the-money if you're neutral to bearish on gold or out-of-the-money if you're bullish on gold). GLD is by far the most liquid (meaning, most capital invested, and most highly traded) gold ETF and probably the best bet for covered call trading. Other ETF choices include DGL which has small open interest (not good), and UGL which is 2x leveraged and therefore quite volatile (not good).

Everyone needs some exposure to emerging markets for diversification. But emerging markets information is hard to come by, inconsistent, and usually in a format that is difficult to digest. So it's another good case for ETFs. The most popular emerging market ETF is EEM (iShares MSCI Emerging Markets Index Fund), which has nearly $41 billion in assets and is highly liquid. Another choice, if you want to limit your exposure to just China, for example, would be to use iShares FTSE/Xinhua China 25 (FXI).

There is one type of ETF that you do NOT want to get involved with for covered calls, and those are the leveraged ETFs. Leveraged ETFs are designed to be two or three times more volatile than an unleveraged ETF. You can normally recognize leveraged ETFs because they have words in their name like "double", "2x", "ultra", "triple", "3x", or "leveraged". Leveraged ETFs are mostly the play thing of day traders and are not appropriate for conservative covered call investors. It can be tempting to do a covered call on one of these because the option premiums are usually very high. But there's a reason for those high premiums! Leveraged ETFs are, by definition, 2x or 3x more volatile than their unleveraged counterpart.

For more information about covered calls, go to Born To Sell. The free covered call investing tutorial talks about downside protection and intrinsic value here http://www.borntosell.com/covered-call-tutorial/intrinsic-value/.