Tue 10 Apr 2007
Made $700 With a Click of Mouse Yet Again
Posted by RichSlick under Money Trades
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This is the third time that I’ve been able to snag at least $700 in profit from ETF Covered Calls. In comparison to mutual funds, ETF kicks Mutual Funds butt out of the ring.
First things first, the first image will illustrate the trading activity of how I’ve made the money. Here is a quick breakdown.
- 12/4/2006 - Buy 1000 Shares of SMH for $34.25 and immediately sell 10 January 07/$35 strike contracts for $0.85/each to make $850.00
- 1/22/2007 - Options Expire Worthless so I keep the 1000 SMH shares.
- 2/02/2007 - Sell 10 March 07/$35 strike contracts for $0.75 to make $750.00 in profit.
- 3/16/2007 - Options Expire Worthless so I keep the 1000 SMH shares.
- 4/10/2007 - Sell 10 May 07/$35 strike contracts for $0.70 to make $700.00 in profit.
If I get called in May at $35, I’ll make another $750 in profit. If I don’t get called in May, I’ll be able to sell August 2007 calls.
Now let’s compare this to someone who bought SMPSX mutual fund similar to the SMH ETF. If I had purchased SMPSX in December 2006 the same day I bought SMH, I’d be down 4% with SMPSX and I’d be even with SMH. But by selling covered calls on the shares I own, I’ve managed to squeeze 6.7% return and this doesn’t even include dividends.
I hope this helps illustrate why I don’t invest in crummy mutual funds and why I feel ETFs are far superior. With an ETF you can sit like a passive investor, you can do a little trading or you can be a bit more aggressive and trade options. It’s the difference between riding a bicycle or driving a car - both will get you to your final destination but one has much greater range, capability, creature comforts and faster speed! Oh yeah, when it rains you won’t get soaked with an ETF like you do with mutual funds!
April 12th, 2007 at 1:46 am
Congratulations on your gains.
I guess you have a lot of faith that this stock isn’t going to tank. What’s your exit strategy? If the price goes much below $32 people aren’t really going to care about short-term $35 calls.
April 12th, 2007 at 7:08 pm
Exactly mbhunter! IF the price goes down to $32, the options I sold will become WORTHLESS because who’d want to buy my 1000 SMH at $35 when they can buy them at the open market for $32. I sold those options to buy my shares at $35 for $700.00. I get to keep the $700 and the shares in your scenario. IF the price went above $35, then I’m forced to sell them to cover my options so I make $750 because I bought them at $34.25. It’s a win-win whether the market goes up or down.
SMH isn’t a stock but a combination of stocks (similar to mutual fund). Here’s a breakdown of the top 10 stocks in the ETF.
ANALOG DEVICES
APPLIED MATERIALS
INTEL
KL A-TENCOR CP
LINEAR TECHNOLOGY
MAXIM INTEGRATED
MICRON TECHNOLOGY
NATL SEMICONDUCTOR
TEXAS INSTRUMENTS
XILINX INC
April 14th, 2007 at 11:58 am
Can you talk about why you do covered calls exchange-traded fund shares instead of regular individual stocks? Is it because they are less jumpy/risky than shares in individual companies?
April 14th, 2007 at 7:08 pm
I’ll give you a few quick reasons: Enron, Worldcomm, Tyco, Global Crossing, Adelphia.
It’s fairly simple, with an ETF it’s harder to be cooking the books or having all companies in at ETF go bankrupt. It’s not out of the realm of possibility but it’s highly less likely than an individual stock.
ETF’s seem to have cyclical up/down trends which are PERFECT for covered calls. I’ll be posting some interesting graphs on my ETF SMH trading which I think you’ll find very interesting. Stay tuned….