I described the long hard way of finding the right ETF to invest –go through the list and look for the right opportunity. I also have an easier way that unfortunately, for the time being, I won’t be able to share with you. I’ve developed my own application to scan all ETFs trading within a certain price range and sectors I’m bullish on. The app downloads the ETFs along with their options, calculates the best returns and displays them for me. What used to take me hours now happens in under a minute. I will periodically post opportunities on this blog and may eventually turn it into a subscription service but for now I’m still tweaking the app and it looks like I will have to continue tweaking it for a while. The good news is that it has worked fairly well so far and it continuously spots great opportunities for me.

I’ve shown you how you can invest in Exchange Traded Funds and squeeze some profit using covered calls but is it really all that great?

I can only think of one entity in the US that can make as much money relatively risk free as they want and that’s the Federal Reserve Corporation; for the rest of us, there is no perfect system of investing. If there were truly any system out there that consistently worked and returned huge profit, word would get out and it would in effect become obsolete in a free market.

Please keep in mind that this strategy is currently about 1/5th of my overall investment strategy.

Lessons Learned to Mitigate Risk

When buying an ETF and selling the call option, there are risks that the price of an ETF will drop; although this may be good if you wish to buy and hold very long term, it is negative if your primary objective is to repeat the covered call selling process. A long term hold on an ETF keeps you from investing in other (possibly better) opportunities.

I currently have a real life example of what can happen when things don’t happen as you’d like. In May of 2006, I purchased 1900 shares of EXPE at $19.75. I immediately sold the May 06 options for $0.95 earning me a quick $1800 (4.8%) in a few days. Unfortunately, EXPE missed earnings and the stock dropped to a low of $13.00 share. I was negative in my investment! Over the past few months however, EXPE has recovered and is currently around $15.70. Prior to this trade, I’ve always gotten called away or liquidated my position without any problems but this was a first.

I currently have two choices with EXPE. I can sell the January ’07 option for about $0.30 to earn another $570 and wait to be called out or wait for the stock to appreciate back to $20 and sell the stock then (or re-sell some more options).  Keep in mind that I am bullish on EXPE and would like to hold it long term but that is not what my intent was with buying it in the context of this blog and investment strategy.

The bad part of this investment isn’t that the stock is down nor that the options aren’t as high as before, the bad part is missing out on other investments that could be yielding me 14% right now!

Lessons learned:

1. Individual stocks are simply too chaotic, I will stick with ETFs moving forward.
2. It may have helped if I hadn’t put all my eggs in one basket and I’ll consider diversifying across two or more ETFs when using this strategy.
3. There are other methods using naked puts that I really should consider using in the future to mitigate some risk.