Protect Your Hedge: Short the Market with these ETF Option Strategies

As recently charted in my blog post here I believed and still believe the market is due for a correction. The chart is a clear head and shoulders pattern of the S&P 500 SPDR (SPY). Some of the ways I've been hedging my portfolio, is by using the leveraged short ETF's. One strategy I have been using on these short ETF's is the Buy/Write option strategy, which hedges my overall portfolio on the downside, and also gives me protection in case the market moves higher.

You'll need to understand options in order to consider the ideas discussed below. To learn about opening and closing these positions and options in general check out my option trading E-Books here.

All data is as of market close Tuesday July 7, 2009.

Buy/Write Option Strategy #1: Buy the UltraShort Basic Materials ProShares (SMN) ETF and sell the July 22.50 call option. Assuming you get called away this will return 7.4% in 10 days. If you don't get called away the premium received gives you a 4% downside protection.

Buy/Write Option Strategy #2: Buy the UltraShort DJ-AIG Crude Oil ProShares (SCO) ETF and sell the July 22 call option. Assuming you get called away this will return 8.4% in 10 days. If you don't get called away the premium received gives you a 3.5% downside protection.

Buy/Write Option Strategy #3: Buy the UltraShort Dow 30 ProShares (DXD) ETF and sell the July 54 call option. Assuming you get called away this will return 6.4% in 10 days. If you don't get called away the premium received gives you a 1.6% downside protection.

Buy/Write Option Strategy #4: Buy the UltraShort Financials ProShares (SKF) ETF and sell the July 49 call option. Assuming you get called away this will return 9.2% in 10 days. If you don't get called away the premium received gives you a 3% downside protection.

Buy/Write Option Strategy #5: Buy the UltraShort Gold ProShares (GLL) ETF and sell the July 15 call option. Assuming you get called away this will return 1.6% in 10 days. If you don't get called away the premium received gives you a 4.2% downside protection. This is a deflationary hedge, however I am more concerned about longer term inflation. A good way to hedge against long term inflation is the GOLD SPDR (GLD).

Buy/Write Option Strategy #6: Buy the UltraShort Industrials ProShares (SIJ) ETF and sell the July 50 call option. Assuming you get called away this will return 6.1% in 10 days. If you don't get called away the premium received gives you a 3.1% downside protection.

Buy/Write Option Strategy #7: Buy the UltraShort Oil & Gas ProShares (DUG) ETF and sell the July 22 call option. Assuming you get called away this will return 5.5% in 10 days. If you don't get called away the premium received gives you a 3.8% downside protection.

Buy/Write Option Strategy #8: Buy the UltraShort QQQ ProShares (QID) ETF and sell the July 37 call option. Assuming you get called away this will return 6.6% in 10 days. If you don't get called away the premium received gives you a 2.1% downside protection.

Buy/Write Option Strategy #9: Buy the UltraShort Real Estate ProShares (SRS) ETF and sell the July 22.50 call option. Assuming you get called away this will return 8.7% in 10 days. If you don't get called away the premium received gives you a 4.2% downside protection.

Buy/Write Option Strategy #10: Buy the UltraShort Russell 2000 ProShares (TWM) ETF and sell the July 49 call option. Assuming you get called away this will return 7.4% in 10 days. If you don't get called away the premium received gives you a 2.6% downside protection.

Buy/Write Option Strategy #11: Buy the UltraShort S&P 500 ProShares (SDS) ETF and sell the July 63 call option. Assuming you get called away this will return 6.7% in 10 days. If you don't get called away the premium received gives you a 2% downside protection.

Buy/Write Option Strategy #12: Buy the UltraShort Semiconductor ProShares (SSG) ETF and sell the July 40 call option. Assuming you get called away this will return 8.8% in 10 days. If you don't get called away the premium received gives you a 2.2% downside protection.

Buy/Write Option Strategy #13: Buy the UltraShort Technology ProShares (REW) ETF and sell the July 45 call option. Assuming you get called away this will return 4.7% in 10 days. If you don't get called away the premium received gives you a 1.5% downside protection.

Buy/Write Option Strategy #14: Buy the Direxion Daily Devlpd Mrkts Bear 3X Shares (DPK) ETF and sell the July 40 call option. Assuming you get called away this will return 17.6% in 10 days. If you don't get called away the premium received gives you a 4.9% downside protection.

Buy/Write Option Strategy #15: Buy the Direxion Daily Energy Bear 3X Shares (ERY) ETF and sell the July 30 call option. Assuming you get called away this will return 13.5% in 10 days. If you don't get called away the premium received gives you a 3.6% downside protection.

Buy/Write Option Strategy #16: Buy the Direxion Daily Financial Bear 3X Shares (FAZ) ETF and sell the July 6 call option. Assuming you get called away this will return 14.7% in 10 days. If you don't get called away the premium received gives you a 3.3% downside protection.

Buy/Write Option Strategy #17: Buy the Direxion Daily Large Cap Bear 3X Shares (BGZ) ETF and sell the July 42 call option. Assuming you get called away this will return 8.8% in 10 days. If you don't get called away the premium received gives you a 3.4% downside protection.

Buy/Write Option Strategy #18: Buy the Direxion Daily Small Cap Bear 3X Shares (TZA) ETF and sell the July 30 call option. Assuming you get called away this will return 18.5% in 10 days. If you don't get called away the premium received gives you a 2.4% downside protection.

Buy/Write Option Strategy #19: Buy the Direxion Daily Technology Bear 3X Shares (TYP) ETF and sell the July 25 call option. Assuming you get called away this will return 6.8% in 10 days. If you don't get called away the premium received gives you a 3.9% downside protection.

These options expire in 10 days (July 18, 2009) therefore the last trading day is Friday July 17, 2009. As you can see the greater the return, the lower the downside protection. I used a more bearish scenario based on the higher strike prices, in the case the option expires out of the money I just write it out for a similar strike for the next month. These ETF's bring very high premiums, but in my opinion should not be written out or held in your portfolio for extensive time periods (see why here).

Of these 19 Buy/Write option strategies the ones that look most attractive to me are the short financial ETF's such as the UltraShort Financials ProShares (SKF) and the Direxion Daily Financial Bear 3X Shares (FAZ). The reason for this is because I think the financials are much over bought and will experience the greatest downside. The top daily holdings for the FAS (the Direxion 3X Bull Financials, inverse of the FAZ) are: JP Morgan (JPM), Wells Fargo (WFC), Bank of America (BAC), Goldman Sachs (GS), Morgan Stanley (MS), Bank of NY Mellon (BK), US Bancorp (USB), and American Express (AXP); and if you look at the table below you'll see that these 8 stocks have moved an average of 136.7% since the current market bottom on March 6, 2009.

Company	March 6 Low	July 7 Close Price	% Change
JP Morgan	14.96	32.81	119.3182
Wells Fargo	7.8	23.33	199.1026
Bank of America	3	12.15	305
Goldman Sachs	73.25	142.54	94.59386
Morgan Stanley	16.7	26.15	56.58683
Bank of NY Mellon	15.67	27.63	76.32419
US Bancorp	8.06	16.9	109.6774
American Express	9.71	22.63	133.0587
Average % Change			136.7077

Unlike the FAS, the FAZ does not have an easy to understand daily list of holdings, but it seeks to return 3X the inverse of the basket of financials in the FAS. And as the table above shows these top holdings have had massive gains since March 6, and assuming the market has a slight correction (I can see the S&P 500 down to the 850 range, the Dow down to the 8000 range, and the NASDAQ down to the 1680 range), I believe the financials will experience the greatest pull back. However the Buy/Write option strategy gives you downside protection as well in case the market gains in the coming 10 days. If the market moves more or less sideways this is also a winning strategy, as these leveraged ETF's have large time values which will deteriorate closer to the option expiration.

If you're more bullish/bearish you’ll want to adjust the strike price accordingly. If you’re even more bearish, write further out of the money calls; you won't have as much downside protection, but you'll give yourself a greater possible return.

This strategy is a great way to hedge your portfolio and could return a large gain in just 10 days. Option volumes have exploded over the past 5 years because it is a great way to hedge your portfolio (see chart here).

For your convenience I have ranked these leveraged ETF's by % Return in the printable spreadsheet below (click image to enlarge).




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Leveraged ETF's Giving Big Premiuns for Short Trade

With just 10 days left until the option expiration, I have crunched the numbers on some of the most popular leveraged ETF's and it looks as if they're getting some summer heat. I am the first to admit that I think these ETF's are only for traders (and are an investor's nightmare), but they are so volatile, and bring such great premiums, it is hard for a trader of options like me to resist. A very short hold of 10 days could yield you a nice return considering it is only for ten days (crunch the numbers on an annual basis). I have developed several strategies with these leveraged ETF's which seem to return steady profits month after month, and I usually wait to implement them within the 2 week expiration period.

This analysis requires the knowledge of options. These would be returns based on the buy/write option strategy (as of market close Monday July 6, 2009). To gain a better understanding of the buy/write option strategy and options in general check out my stock options trading E-Books for sale on this blog.

For this analysis I used a rather bullish approach on both the bear and the bull ETF's to gain a higher return (assuming the ETF expires above the indicated strike which is unlikely but very possible) and a lower downside protection. If using any of these ideas, you will most likely have to adjust strike price and expiration according to your opinion.

Understanding the Tables:

Strike Price: The price I chose for the ETF to close at or above at expiration in order to sell the stock (stock sold at strike price).
% Return: This is how much the position would return (less commissions) if the stock were purchased at beginning of trade and the indicated option immedietly sold, and the stock closed at or above the indicated strike price as of July 18, 2009 (option expiration).
% Protection: This is how much the stock could go down before you start losing money on the position.

ETF	Ticker	Strike	%Return	% Protection
2X Leveraged Bull ETF's
Ultra Basic Materials ProShares	UYM	16	4.6	4.6
Ultra DJ-AIG Crude Oil ProShares	UCO	11	5.9	5.9
Ultra Dow30 ProShares	DDM	28	3.6	2.8
Ultra Financials ProShares	UYG	4	11.5	2.2
Ultra Gold ProShares	UGL	33	2.3	2.3
Ultra Industrials ProShares	UXI	19	5.5	2.4
Ultra Oil & Gas ProShares	DIG	25	6.5	2.8
Ultra QQQ ProShares	QLD	36	3.2	3.7
Ultra Real Estate ProShares	URE	3	2	14.6
Ultra Russell2000 ProShares	UWM	18	4.2	4.9
Ultra S&P500 ProShares	SSO	25	3.7	3.2
Ultra Semiconductor ProShares	USD	20	5.8	3.2
Ultra Technology ProShares	ROM	30	2.3	4.5
2X Leveraged Bear ETF's
UltraShort Basic Materials ProShares	SMN	20	4.5	7.5
UltraShort DJ-AIG Crude Oil ProShares	SCO	20	6.4	5.7
UltraShort Dow30 ProShares	DXD	50	3.9	2.8
UltraShort Financials ProShares	SKF	45	5.7	4.6
UltraShort Gold ProShares	GLL	15	1.4	3.7
UltraShort Industrials ProShares	SIJ	45	3.5	4.8
UltraShort Oil & Gas ProShares	DUG	21	6.1	3.7
UltraShort QQQ ProShares	QID	34	4	3.2
UltraShort Real Estate ProShares	SRS	20	6.1	5.9
UltraShort Russell2000 ProShares	TWM	45	5	4.3
UltraShort S&P500 ProShares	SDS	59	5.1	2.9
UltraShort Semiconductor ProShares	SSG	35	4.1	6.4
UltraShort Technology ProShares	REW	40	2.2	5.9
3X Leveraged Bull ETF's
Direxion Daily 10 Yr Trsy Bull 3X Shares	TYD	50	2.2	1.8
Direxion Daily 30 Yr Trsy Bull 3X Shares	TMF	40	2.7	5.2
Direxion Daily Devlpd Mrkts Bull 3X Shrs	DZK	50	6.7	5
Direxion Daily Energy Bull 3X Shares	ERX	25	5.8	7.1
Direxion Daily Financial Bull 3X Shares	FAS	9	11.8	3.8
Direxion Daily Large Cap Bull 3X Shares	BGU	32	6.4	4.5
Direxion Daily Small Cap Bull 3X Shares	TNA	26	7.2	5.5
Direxion Daily Technology Bull 3X Shares	TYH	80	3.2	7.6
3X Leveraged Bear ETF's
Direxion Daily 10 Yr Trsy Bear 3X Shares	TYO	70	2.7	2
Direxion Daily 30 Yr Trsy Bear 3X Shares	TMV	80	5.8	3
Direxion Daily Devlpd Mrkts Bear 3X Shrs	DPK	35	12.9	7
Direxion Daily Energy Bear 3X Shares	ERY	25	5.9	7.3
Direxion Daily Financial Bear 3X Shares	FAZ	5	6.1	8.4
Direxion Daily Large Cap Bear 3X Shares	BGZ	39	7.8	4.1
Direxion Daily Small Cap Bear 3X Shares	TZA	25	8.2	5.5
Direxion Daily Technology Bear 3X Shares	TYP	22.5	4.9	5.6

From the list above I am most interested in: (UCO), (SCO), (SRS), (SMN), (ERX), (TNA), and (TZA). These leveraged ETF's are among some of the highest return % if called out and offer good downside protection. Many of these are the bears which is another reason I am interested in using them as my portfolio is about 80% long positions, and this will help reduce my risk.

There are many more covered call ETF strategies to profit from. If you're more conservative and want to take on less risk check out the ETF's listed in the table below. However these all receive much lower premiums than the leveraged ETF's. Compare the leveraged ETF option premiums to the option premiums on the most popular ETF's (no leverage tracks basket 1X) such as those in the table below:

Consumer Discret Select Sector SPDR (XLY)

Consumer Staples Select Sector SPDR (XLP)

DIAMONDS Trust Series 1 (DIA)

Energy Select Sector SPDR (XLE)

Financial Select Sector SPDR (XLF)

Industrial Select Sector SPDR (XLI)

iShares Dow Jones US Energy (IYE)

iShares Dow Jones US Real Estate (IYR)

Materials Select Sector SPDR (XLB)

PowerShares QQQ (QQQQ)

SPDR Gold Shares (GLD)

SPDR S&P 500 (SPY)

SPDR S&P Metals & Mining(XME)

SPDR S&P Retail (XRT)

Technology Select Sector SPDR (XLK)

United States Natural Gas (UNG)

United States Oil (USO)

Utilities Select Sector SPDR(XLV)

Any of the ETF's listed in the above table are much more safe and investor friendly, however if you are a trader and seeking premium it would be in your best interest to keep an eye on some of the leveraged ETF's mentioned in this article.

To get more information about trading options check out my E-Books.

For your convenience I have put together printable spreadsheets of both the 2X and 3X leveraged ETF's ranked from least to greatest % Return and % Downside Protection below.

2X Ranked by Return:


2X Ranked by % Downside Protection:


3X Ranked by % Return:


3X Ranked by % Downside Protection:
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Seeking Premium: 20 High Delta High Stock Return Option Strategies

With less than 2 weeks until the next option expiration, I wanted to put together a list of buy/write option strategies on strong stocks (based on one of my methods of finding bullish stocks), that had a greater than or equal to 50% current probability of expiring in the money on July 18, 2009 (closest current option expiration), and gave decent downside protection as well as a decent return if the option expires in the money and the stock is sold at the strike price.

The list below includes: Company name (sorted alphabetically), Ticker, Strike Price (noted by Strike, all for July options expiration), Downside Protection in % (noted by Downside), Return on Buy/Write option strategy in % if stock gets called out at expiration (noted by Return), Current probability in % option market is factoring in that the stock meets or exceeds strike price at expiration (noted by Prob.), and if the stock is currently above the strike price known as in the money (noted by IN$).

Company		Ticker	Strike	Downside	Return	Prob.
Akamai Technologies		AKAM	19	5.14	2.88	61		IN$
Amazon.Com		AMZN	75	6.74	1.3	76		IN$
Apple		AAPL	140	2.48	2.46	51.7		IN$
Baidu Ads		BIDU	290	5.22	3.59	51.5
Celgene		CELG	46	3.81	2.25	59.9		IN$
Citrix Systems		CTXS	30	5.94	2.21	67.3		IN$
Cognizant Tech Sol Cl A		CTSH	25	6.95	0.9	80.1		IN$
Express Scripts		ESRX	65	3.82	1.93	62.8		IN$
Fiserv		FISV	45	2.11	1.91	51.6		IN$
Gilead Sciences		GILD	46	2.29	2.51	50.2
Google		GOOG	410	3.35	3.72	50.1
Infosys Technologies Ads		INFY	35	6.21	2.87	64.1		IN$
Joy Global		JOYG	34	5.1	4.14	55.5		IN$
Juniper Networks		JNPR	23	4.88	2.55	62		IN$
Life Technologies		LIFE	40	3.03	2.38	55.5		IN$
O Reilly Automotive		ORLY	35	7.75	1.26	77.7		IN$
Oracle		ORCL	21	2.04	1.85	51.4		IN$
Research In Motion		RIMM	70	3.26	3.67	50
Ross Stores		ROST	37.5	3.17	2.14	58.3		IN$
Yahoo		YHOO	15	3.27	3.34	50.7

The table above allows you to see which stocks (out of my list of 20 chosen) have the best chances at the highest possible returns ("best bang for your buck"). I use this method to choose which stocks I'll be buying to write out immediately. As a higher risk investor, from this table I am most interested in the following stocks: Yahoo (YHOO), Baidu (BIDU), Research in Motion (RIMM), Google (GOOG), and Joy Global (JOYG). This is because all five of these stocks have higher than average returns (assuming they expire above the indicated strike price). A more conservative investor may be interested in choosing the stocks which yield the most downside protection and highest probability of getting assigned at option expiration. You can view printable spreadsheets of the 20 stocks analyzed in this report ranked in order from least to greatest: Return %, Downside Protection %, and % Probability of expiring in the money, at the bottom of this post.

I like using this strategy because even if I'm not called out on the Stock/ETF (at expiration), I'll still have it to write out again at my desired strike price and date again for another premium. Check out my Option E-Books to learn about more strategies such as straddles, strangles, spreads, like the ones mentioned above, options pricing, and more.

To get an idea of what the Sector ETF's are bringing for premiums I have put together a list of the most popular sector SPDR ETF's below.

Sector		Ticker		Strike			Downside			Return			Prob.
Consumer Discret		XLY		22			3.59			2.29			61.5		IN$
Consumer Staples		XLP		22			4.72			0.83			82.5		IN$
Energy		XLE		46			2.79			2.45			53.8		IN$
Financial		XLF		11			5.67			1.57			71.7		IN$
Health Care		XLV		25			3.5			0.58			76.4		IN$
Industrial		XLI		21			3.51			1.83			61.6		IN$
Materials		XLB		25			2.98			2.39			53		IN$
Technology		XLK		17			5.44			0.79			80.3		IN$
Utilities		XLU		27			2.73			1.13			62.7		IN$

As you can see these are even better for a conservative investor, as they have very high downside protection (average of 3.88% among the 9 ETF's analyzed) and a greater than two-thirds chance of expiring in the money at option expiration. However the trade off is that the average return % (assuming the ETF is called out at expiration) is almost 40% lower than the average return for the 20 individual stocks.

Printable Spreadsheets (click on image to enlarge):

Stocks ranked by Downside Protection %:
Stocks ranked by Return %:
Stocks ranked by % Probability:



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Broker Review: Cheap Commissions and Great Trading Tools - So Far Super Impressed!

Monday I started trading with a new company known as Options House. I can't believe how easy their platform is, and how cool and useful their tools are considering each stock trade is a flat fee of $2.95, and each option trade is a flat fee of $9.95 (unlimited contracts!) and absolutely no hidden fees! I decided to share this so all my blog readers could know how impressed I am with them. When I said cool and useful tools, I meant it, just read on below and I'll tell you about some of my favorite tools and provide you with a few screen shots of them. Perhaps the best part of all is that you can try all the tools for free without funding a penny into your account. You'll need to open an account, and then you can add as many virtual dollars to your account as you want. I was impressed with the virtual trading, as it is very accurate! Also this is one of very few virtual trading programs that allows you to trade options at real time quotes, which is extremely cool! For you beginner option traders out there, I recommend this before you jump into the real thing!

You can virtual trade at optionhouse.com by simply opening an account, and logging in -then you're ready for virtual trading!

Below is a screen shot of the different tools they offer (click image to enlarge):

All of the investigator tools are great! It will actually save me a ton of time to use these investigator tools. For example the covered call investigator allows me to get a general annual earnings return, based on current percentages. So as the screen shot shows below, I could purchase FAZ and sell the August 57 for a potential bid of 8.80 a share (bid and ask prices split in the middle) or $880 per contract. It calculates the potential annual return and the downside protection for that as well (click image to enlarge).

Not to mention they have a really cool probability calculator for options. I wanted to see what the current probability was for the S&P 500 to close above 900 for the July option expiration (Saturday July 19, 2009). It returns much more than that. Check out the probability screen shot below (click on image to enlarge).

As you can see all I had to do was put in the symbol, put in values for low target price and high target price (leaving all other fields as defaults), and the probability for finishing below the lower target, finishing between the two targets, and finishing above the higher target was calculated almost instantaneously.

I must say I am very impressed with this trading platform!



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Firework Stock Picks: Breakout Stocks on High Volume

For the fourth of July, I thought I would do a special report on four names which have experienced a large upside move (near 2 month high) on extremely high volume (compared to 3 month average for stock volume). Moving up is always a good sign for any stocks, on BIG volume is an even better sign.

The four stocks are listed below:

Company	Symbol	% Change	Avg Volume	Volume Thursday
Leading Brands	LBIX	25.53	129,841	918,587
Labopharm Inc	DDSS	17.70	172,459	969,465
Oshkosh Corp	OSK	8.14	1,552,530	6,191,449
Orexigen Therapeutics	OREX	6.78	427,136	647,301

The stocks are ranked in order from the greatest % volume change (above volume) to least. It also happens to be their % change on Thursday.


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Stock Market is Closed & I'm Enjoying the Day Off

It is nice to be able to spend time with family today, as the stock market is closed. I will be posting some material later tonight with my "Independence Day Firework Stock Picks". These are stocks I'll be watching that have moved up on a significant volume increase. Thanks for reading my stocks and options trading blog, and I hope you all have a wonderful holiday weekend! Sphere: Related Content

Stock Market Finishes Week WEAK! Perhaps Market will Pull Back Slightly

To finish this short trading week the indices finished the day lower. This sell off was sparked after a dismal jobs report. The Dow Jones Industrial Average finished lower by 223.32 points, S&P 500 lower by 26.91 points, and the NASDAQ lower by 49.20 points.

Looking at the charts we can see a bearish pattern has formed, the head and shoulders pattern. The chart below of the S&P SPDR (SPY) is marked up to illustrate this pattern.

(click to enlarge)


A bullish sign would be an uptrend pattern which is higher highs and higher lows. However as you can see after the market peaked in early June (black line labeled top of head) and a bounce off resistance in later June (black line labeled bottom of right shoulder), we did not set new highs before selling off or forming the second (right) shoulder. A critical point to hold above is 89 on the SPY. If we can hold above 89, and eventually break above the 93 range on the SPY, I think we have a shot at testing the highs of 96 and eventually moving higher. However, if we break below 89 on the SPY, I believe the S&P will be in a downtrend until 85 on the SPY (850 range on the S&P 500).

The only silver lining from Thursday's sell off was that the volume was on the lighter side.


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