The ETF spread has a long position and a short position. The short position profits if the underlying ETF declines in price. This spread strategy has several advantages that can allow you to profit in volatile markets:
This gives the spread strategy a huge advantage over ETF and ETF option directional trades that require the ETF price to move in the right direction to profit.
When you have a profitable ETF call option trade should you hold the trade for further upside profit potential . . . Or do you take profits in case the ETF declines in price with the possibility of a profitable ETF option trade turning into a loss?
In this video learn how to manage profitable ETF call option trades by legging into a spread trade to help protect profits and also increase the profit potential of the existing ETF call purchase. Creating a spread trade for a profitable call option trade also helps us achieve our overall goal of maintaining a better than 3, to 1 Profit to Loss Ratio.
We will also look at an actual ETF option spread trade for the Utility ETF symbol XLU. We purchased the XLU 42-Strike call @4.74. The Utility ETF moved up in price, and we had a profit on our call option purchase. We the legged into a spread trade by selling to open the XLU 48-Strike call @ 1.90. This created a bullish option spread. The Option Spread Analysis below displays the profit potential for our XLU spread trade.
This analysis reveals the profit potential for this option spread trade assuming various price changes for the Utility ETF at option expiration from a 7.5% increase in price to a 7.5% decrease in price.
The analysis reveals that if XLU remains flat or increases in price at all at option expiration, we will realize a $316 profit and a 111.3% return (circled). A 5% decline in XLU would result in a 104.4% return, and a 7.5% decline would result in 60.1% return. A 60% return when the underlying ETF declines in price, is a great way to profit in volatile or non-trending markets.
When you purchase a call option, the underlying ETF must increase in price or the call option will lose value possibly resulting in a 100% loss for your call option trade.
The video below will explore the ETF option spread advantages listed below:
1. Reduced Cost - An ETF call option spread is created by simultaneously purchasing a call option and selling a call option with a higher strike price. The sale of the call option reduces the cost of the option purchase. Most ETF option spreads cost $600 to $800.
2. The Option Sale Provides Downside Protection - The sale of a call option results in cash being credited to your brokerage account. This reduces the cost basis of the option purchase and provides downside protection in the event the price of the underlying ETF declines in price.
3. Spreads Can Be Profitable If an ETF Goes Up or Down - Depending on the strike price, option spreads can be profitable if the underlying ETF price increases, decreases or remains flat at option expiration. Many of our ETF spread trades can profit if the underlying ETF is down as much as 10% at option expiration.
4. Higher Percentage of Winning Trades - If your ETF debit spread can profit if the underlying ETF price increases, decreases or remains flat at option expiration then you will experience a higher percentage of winning trades compared to ETF directional option trades.
5. Allows You to Maintain Positions During Volatile Markets - The downside protection provided by the sale of a call option to create an ETF spread can help you maintain your spread trade during volatile markets. If you traded option purchases only, volatile price swings in the underlying stock can result in getting stopped out of your directional call option trade.
The video below will explore selecting the type of ETF Spread Strategy to utilize based on an Exchange-Traded Fund's volatility. We will utilize four types of ETF spreads:
Four Types of ETF Spreads
1. Debit Spreads
2. Covered Calls
3. Profit Guard Spreads
4. Married Put Spreads
Profit Guard and Married Put Spreads are initiated by purchasing a put option for downside protection in case the underlying Exchange-Traded Funds declines in price. ETFs with low-cost option premiums offer more profit potential for Profit Guard and Married Put Spreads.
Debit Spreads and Covered Calls are initiated by selling call option premium. ETFs with rich option premiums offer more profit potential for Debit Spreads and Covered Calls. Learn the criteria we use to determine if an ETF offers rich premiums.
The video below will look at how a low-risk spread trade was initiated for the Internet ETF symbol FDN. The top holdings in the Internet ETF are listed below and include the FANG stocks.
The maximum risk for this spread trade was 3.3% regardless of the price movement of the Internet ETF even if the ETF declined 50% in price. At the same time, there is no limit on the profit potential for this spread trade if FDN continues to move up in price.
FDN ETF Spread Trade
1. Maximum risk 3.3%
2. Unlimited profit potential
3. Participate in the strongest stock market sector
Top Holdings FDN ETF
|Facebook Inc A||FB||8.18%|
|PayPal Holdings Inc||PYPL||4.83%|
|Alphabet Inc C||GOOG||4.78%|
|Alphabet Inc A||GOOGL||4.70%|
|E*TRADE Financial Corp||ETFC||2.88%|
If we can identify a market sector moving up in price, we can also profit from purchasing call options on Sector Exchange-Traded Funds which allows us to harness the leverage options provide.
The video below will explore a strategy for selecting low-risk entry points for an ETF option purchases. A low-risk entry point helps prevent being stopped out of a trade and increases the accuracy of our options trading.
We will also explore our 1% Rule for selecting an option strike price with a high probability of success. Actual ETF option trades will be used to demonstrate how low-risk entry points and the 1% Rule can help you become a more profitable ETF option trader.
This strategy generates weekly cash income from the sale of call options on Exchange-Traded Funds. If you collect a 2% weekly payout, you have the potential to collect a 100% cash payout over the course of one year. This can cover the original cost to purchase one hundred shares of the ETF. If you collect a 100% cash payout a lot can go wrong, and your trade will still be profitable.
The strategy is easy to implement in a standard brokerage account, and you only need a $3,500 trading account to get started. We focus on ETF's that generate a 2 to 3% cash payout each week. This allows us to collect cash payouts over the course of one year, that exceed the original cost basis to purchase 100 shares of the ETF.
The weekly covered call strategy only takes about 20 minutes a week to implement and incurs less risk than a buy and hold strategy. Learn how you can start collecting weekly cash income from this low-risk strategy.
The weekly covered call strategy is working well in the current volatile market conditions with rich option premiums.
This video will explore trade management techniques for trading weekly covered calls. Chuck uses a trade management technique that will allow us to keep our stock/ETF shares in our account so we can collect a weekly cash payout from selling call option premium.