ETFs for Covered Calls

ETF stands for Exchange Traded Fund. It is a collection of stocks that trades like a stock. And, notably, many ETFs are optionable (meaning you can use them for covered calls).

Example: the symbol IWM represents an ETF that is comprised of 2000 stocks (the Russell 2000). When you buy IWM you are buying a basket made up of 2000 stocks. Other popular ETFs include QQQ (NASDAQ 100), SPY (S&P 500), and DIA (Dow Jones Industrial Average).

Q: Why use ETFs for covered calls?

A: Because of diversification and potentially lower volatility. Some investors don't like to take single-stock risk because of the potential for news about the company or its industry (e.g. an earnings report) that can cause dramatic stock movement.

With an ETF, which is a collection of stocks, you remove the single-stock risk. It is still possible for exchange traded funds to be volatile but normally an earnings report or buyout of a single component of the fund will be muted compared to owning the single stock.

Of course, with lower volatility, the time premium on ETFs is usually less than on single stocks. But for risk-averse investors, or investors who may have smaller accounts (and appreciate the diversification), exchange traded funds are probably a good choice.

Important safety note

Some funds are leveraged, meaning they are designed to be two or three times more volatile than an unleveraged ETF. You can usually recognize leveraged ETFs because they have words in their name like "ultra", "double", "2x", "triple", "3x", or "leveraged" (or, on this site, the symbols will be in red to warn you). Be very careful with these! While an unleveraged ETF can provide some safety through diversification, a leveraged ETF can be a very volatile entity.

Finding exchange traded funds is easy on Born To Sell: just check the Only ETFs checkbox in the Advanced Filters section of any Search page. All the results shown will then be ETFs.

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