Writing Covered Call Options On “Inverse” Exchange-Traded Funds

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December 1, 2009 5:08pm ETF BASIC NEWS NYSE:FXI

inverse“Covered call income is unique in the world of finance. It’s the only way I know to earn a high yield, without taking a flyer on some issuer’s


 ability to pay you back. With all the risk in the credit markets right now, earning income this way is an incredibly useful strategy. If you think stocks are set for a period of profit-taking weakness like I do, here’s a unique covered call strategy to consider: writing covered call options on “inverse” exchange-traded funds (ETFs),” Tom Dyson Reports From Daily Wealth.

“Inverse ETFs are investment funds set up to move in the opposite direction of conventional stocks and ETFs. Take the inverse China ETF (FXP) for example. It is structured to return double the inverse of the major China ETF (FXI). Or the inverse financial ETF (SKF). It is set up to return double the inverse of a bank stock index. (Due to the imperfect way they are set up, these funds don’t perfectly mirror regular returns. But over the short term, they get close,” Dyson Reports.
 
“SKF falls when the bank stocks rise. It rises when bank stocks fall. Right now, SKF is cheap, having fallen from more than $200 a share to $24. Meanwhile, there’s plenty of volatility in the stock price. Right now, SKF trades for $24.50. You can buy a batch of shares and sell January $26 call options on the position for $1.41. That’s a 5.7% instant payment on your ETF… for just two months. And you get to keep a little bit of upside,” Dyson Reports.

“Selling covered calls on SKF makes money as long as bank stocks don’t soar and send SKF down in value. It makes money if bank stocks trade sideways or decline a bit. I don’t recommend this sort of “income trading” to most investors. It requires a good sense of timing. It requires you to be handy with options. But conventional income investing just isn’t paying off right now. If you’re comfortable with doing a little extra work, consider the strategy above,” Dyson Reports.

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