Why I Sell Put Options Instead of Setting Limit and Market Orders Part II

As promised in Why I Sell Put Options Instead of Setting Limit and Market Orders Part I, where I shared why I never set market orders and rarely set limit orders when purchasing stocks, this is part 2 where I am going to show you the benefit of writing naked put options on 40 leveraged ETF's. To understand this post you'll need somewhat of a background in stock options. To learn more about options and, how options can help protect your portfolio, and allow you to speculate with less money up front click here.

If you're finding this post for the first time and don't know the benefits of selling put options compared to setting market and limit orders, you may find it valuable to read Part I. If you're following up Part I, you'll notice writing naked puts on these leveraged ETF's bring much greater premiums.

All data as of market close Monday July 20, 2009.

HOW TO READ THE TABLE

NOTE: When using this strategy, I first decide what I am willing to pay for the ETF. Let's keep it simple and say I'm willing to buy the ETF at a price of 5% lower. In order to fit this table in my blog, I needed to use abbreviations in the table.

Abbreviations used in table:
Price: The most recent closing price (last quote price) for the ETF
5%: The price which I am willing to pay for the ETF which is 5% lower than the closing price
Strike: The closest contract strike price to the 5% lower price. It may be slightly higher or slightly lower than the 5% lower price.
Prem.: This is the theoretical premium received from selling the put option
Adj. Cost: This is the adjusted cost for the ETF, if you do happen to end up with the shares at expiration.

The first ETF listed in the table below is the Direxion Daily Financial Bear 3X (FAZ). An example of this option strategy on the FAZ would be interpreted as:

Sell the Direxion Financial Bear (FAZ) August 39 put option. This will give you $3 a share or $300 per contract. If FAZ expires above the indicated strike price, you profit 100% of the premium received, if not your cost per share of the stock is $36, 12.2% lower than the close price and 7.7% lower than the price I was willing to pay with a limit order.

ETF			Ticker	Price	5%	Strike	Prem.	Adj. Cost
Direxion Daily Finanancial Bear 3X			FAZ	41.01	38.96	39	3	36
Direxion Daily Financial Bull 3X			FAS	49	46.55	46	3.4	42.6
Direxion Daily Energy Bull 3X			ERX	30.7	29.17	29	2.05	26.95
Direxion Daily Energy Bear 3X			ERY	20.34	19.32	19	1.3	17.7
ProShares UltraShort Basic Materials			SMN	16.97	16.12	16	1.05	14.95
Direxion Daily Small Cp Bull 3X			TNA	30.26	28.75	28	1.75	26.25
ProShares UltraShort DJ-UBS Crude Oil			SCO	19.41	18.44	18	1.08	16.92
ProShares Ultra DJ-UBS Crude Oil			UCO	11.05	10.50	10	0.6	9.4
ProShares Ultra Financials			UYG	4.09	3.89	4	0.22	3.78
ProShares UltraShort Real Estate			SRS	18.07	17.17	17	0.95	16.05
Direxion Daily Large Cap Bull 3X			BGU	37.1	35.25	35	1.95	33.05
Direxion Daily Tech Bull 3x			TYH	107.38	102.01	100	5.25	94.75
ProShares Ultra Industrials			UXI	21.05	20.00	20	0.93	19.07
Direxion Daily Large Cap Bear 3X			BGZ	31.24	29.68	29	1.38	27.62
ProShares Ultra Oil & Gas			DIG	27.34	25.97	26	1.1	24.9
ProShares UltraShort Oil & Gas			DUG	17.87	16.98	17	0.7	16.3
Direxion Daily Small Cap Bear 3X			TZA	19.78	18.79	17.5	0.77	16.73
ProShares Ultra Technology			ROM	36.3	34.49	35	1.38	33.62
ProShares UltraShort Financials			SKF	38.73	36.79	36	1.45	34.55
Direxion Daily 30 Year Treasury Bull			TMF	37.57	35.69	35	1.4	33.6
ProShares UltraShort Semiconductors			SSG	27.47	26.10	25	1.02	23.98
ProShares Ultra Semiconductors			USD	24.85	23.61	22.5	0.9	21.6
ProShares UltraShort Russell2000			TWM	39.29	37.33	37	1.42	35.58
ProShares Ultra Russell2000			UWM	20.41	19.39	19	0.73	18.27
ProShares Ultra Basic Materials			UYM	19.81	18.82	17.5	0.68	16.82
ProShares Ultra QQQ			QLD	41.26	39.20	39	1.3	37.7
ProShares Ultra S&P500			SSO	27.77	26.38	26	0.8	25.2
Direxion Daily 30 Year Treasury Bear			TMV	82.9	78.76	75	2.3	72.7
Direxion Daily Dpd Mkts Bear 3x			DPK	27.71	26.32	25	0.75	24.25
ProShares Ultra Dow30			DDM	31.31	29.74	29	0.7	28.3
Direxion Daily Tech Bear 3x			TYP	17.19	16.33	15	0.38	14.62
ProShares Ultra Real Estate			URE	3.69	3.51	3	0.08	2.92
ProShares Ultra Gold			UGL	34.8	33.06	33	0.75	32.25
ProShares UltraShort S&P500			SDS	51.24	48.68	48	1.1	46.9
ProShares UltraShort Dow30			DXD	43.41	41.24	41	0.93	40.07
ProShares UltraShort QQQ			QID	29.15	27.69	27	0.6	26.4
ProShares UltraShort Industrials			SIJ	39.4	37.43	35	0.77	34.23
Direxion Daily 10 Year Treasury Bull			TYD	48.38	45.96	45	0.85	44.15
Direxion Daily 10 Year Treasury Bear			TYO	70.64	67.11	65	0.82	64.18
ProShares UltraShort Gold			GLL	14.5	13.78	13	0.13	12.87

All of these options expire on August 22; therefore the last trading day is Friday, August 21, 2009.

These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

I've been using this strategy to purchase my shares and I find it has been working well. It's a bad idea to use this strategy as a form of speculation, in other words selling a put for the premium just because you think a stock will never get to a lower strike by options expiration. Remember even if the stock goes to $0 a share, you're still obligated to buy it for the indicated strike.

To learn more about selling puts and other option strategies check out my option trading books.

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