My weekly options column is meant to provide readers with the ability to generate additional monthly income from holdings they may have, or may want to have. The idea is that you don’t have to just settle for dividend stocks that pay 2%-4% and risk overpaying for a “blue-chip” stock that also happens to be overvalued by 50%-100% because everyone is chasing yield.
Likewise, by selling covered calls or naked puts, you reduce your risk by having the option expiration date no more than a few months out. In addition, you’ll be selling covered calls or naked puts on stocks you want to own, already own, or don’t mind owning if they are put to you.
This can be an especially enticing way to get your hands on undervalued stocks at effective prices that are below where they are even trading.
ETFs are an even better way to do this because if you are holding it, you are protected with its diversification.
Here are three option plays with ETFs where you can make a $1,000 profit:
3 ETFs to Make $1,000 With Covered Calls: SPDR S&P Dividend ETF (SDY)
The SPDR S&P Dividend ETF (NYSE:SDY) is a great place to start. The ETF essentially takes the best of the dividend aristocrats — ones with the highest yields, for starters — and drops them into a diversified fund. It has 11 major sectors represented, and the ETF itself yields 2.2%.
So if you buy it here at $79, you may want to consider selling the Jul $79.05 covered calls for $2.05. First of all, you earn a 2.6% return for a four-month holding period, or about 7.8% annualized. You’ll also get a dividend payment of 43.45 cents per share in June, boosting your yield to 3.15%, or 9.45% annualized.
This is a nice, safe return for a nice, safe ETF. If you end up holding it, then you get to hold a basket of dividend aristocrats. There are worse things to hold.
Sell two of these for a $410 premium total.
3 ETFs to Make $1,000 With Covered Calls: iShares Transportation Average ETF (IYT)
Things are looking good for the transportation sector, as falling oil prices means that anything that moves goods around are in for lower expenses. Have a look at the iShares Transportation Average ETF (NYSE:IYT).
All the major transportation companies across all the sectors are represented: airlines, railroads, package delivery, trucking, logistics, etc.
Here you have an ETF trading at $161.35, and only 4% off its 52-week high. You may want to buy the IYT and sell the Jun $165 covered calls for $3.75. With this strategy, you immediately collect a 3% premium, which is pretty impressive for an ETF. The three-month holding period means this works out to 12% annualized return.
However, if the ETF gets called away, you also enjoy $3.65 in capital appreciation, or another 2.2%, for a total return of 5.2%, or 20.8% annualized.
So sell one of these for $375, bringing your total premium to $885 collected thus far.
3 ETFs to Make $1,000 With Covered Calls: Guggenheim S&P 500 Equal Weight ETF (RSP)
Finally, have a look at Guggenheim S&P 500 Equal Weight ETF (NYSE:RSP). I like these equal-weight ETFs because they are less volatile than their cap-weighted counterparts in general.
Because every stock counts for the same amount of value in the index, if a few big tech names get hit and take down the cap-weighted index, the equal-weight doesn’t experience the same downdraft. It gets blunted.
This is a way to go long the broad market without taking on all of the risk. It limits your upside as well, but for those seeking capital preservation, it’s a good choice.
The ETF trades at $82, so consider selling the Jun $82 covered calls for $2.30. You earn a 2.9% return for a three-month holding period, or 11.6% annualized. If you get stuck with it, why be upset? You probably are already holding some version of the S&P 500 in your portfolio already.
Just sell one and you’ll have collected $1,115 this month.
As of this writing, Lawrence Meyers owned shares of IYT.
