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Daily Stock Market Equity and Options Trading Commentary

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Monday, July 20, 2009

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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