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One of the most popular ETFs for covered call writers is the QQQ ETF or the "NASDAQ- 100 Index Tracking Stock®. According to Invesco, QQQ “is an exchange-traded fund based on the Nasdaq-100 Index®.
The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization.”
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ETFs are well diversified and generally experience lower levels of implied volatility than individual stocks. However, because the Qs are based on high flying tech stocks, the implied volatility is higher than many other ETFs, making it a prime candidate for covered call writers.
Looking at the implied volatility of some of the main ETFs yields the following results:
- QQQ – 19.23%
- SPY – 16.07%
- XLF – 16.89%
- DIA – 15.16%
- GLD – 10.59%
As you can see, the Qs tend to have a higher implied volatility than other popular ETFs. This means richer option premiums for covered call sellers.
The recent bearish action in stocks has also swelled option premiums thanks to the rise in investor fear and overall market volatility. Covered calls have the potential to produce higher income when volatility is high.
Looking at some covered call ideas on these ETFs, let’s take the closest at-the-money strike to select our call option. Doing this limits the upside of the trade, but provides the highest level of income potential. Remember that time premium is at its highest for at-the-money options.
As you can see from the table below, QQQ provides the highest potential return for a covered call seller assuming the stock stays flat and the call expires worthless.
The return of 16.82% p.a. is significantly higher than that available when trading SPY (13.22%) and DIA (12.11%). Of course, as we know with higher returns comes higher risk; that is the tradeoff.
Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.