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Diversify With Covered Calls on ETFs

Sexy it’s not but remember - the tortoise beat the hare


Proper diversification is the key to long-term investment survival. The goal is to have non-correlated investments across asset classes, industry sectors, geographies, and time horizons.

Covered call options are a good strategy because they can help you lower risk and increase yield on your well-diversified portfolio. Options trading investors can invest in stocks or exchange-traded funds (ETFs) that track real estate, commodities, interest rates, industry sectors, geographies, and more. By writing calls against those investments you collect time premium on the whole lot as time passes.

Diversification via ETFs is a good strategy for smaller accounts because you can buy an ETF that is itself diversified, and then write calls against it for income. Examples include the iShares Russell 2000 Index (NYSE: IWM), or the SPDR S&P 500 ETF (NYSE: SPY).

How much diversification should you have? There are two schools of thought on this: On the one hand if you are perfectly diversified your returns will likely be average; on the other hand concentrated positions can work for or against you depending on your stock and asset picking skills.

Find more option analysis and trading ideas at Options Trading Strategies.

More diversification is better than less for the average investor. While momentum investing can be fun, once that party reverses course you’ll be lucky to see it coming and get out while you still have a profit. Remember the tortoise and the hare? If you think you just can’t stand to have a boring portfolio, especially when everybody around you is talking about today’s hot thing, just remember the tortoise. He’s the guy with the low-volatility, fully diversified portfolio who avoids unpleasant surprises and eventually wins the race.

Born To Sell  — Covered Call Favorites

The Top 4 covered calls that Born To Sell members have written with three weeks to go til April expiration (in order of popularity):

Rank Company Strike
2 JDS Uniphase (NASDAQ: JDSU) 20
3 Microsoft (NASDAQ: MSFT) 26
4 Freeport-McMoRan (NYSE: FCX) 55

Mike Scanlin operates Born To Sell, a web site dedicated to helping people earn monthly income from selling call options.

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