Covered Call Play in Focus: UVXY
What's a Covered Call?
The covered call is a strategy where an investor writes a call option contract (sells an option) while at the same time owning an equivalent number of shares of the underlying stock.If this stock is purchased simultaneously with writing the call contract, the strategy is commonly referred to as a buy-write.
While you may have heard that trading options is risky business, covered calls are actually a very conservative strategy, and most brokerages even allow retirement IRA accounts to write covered calls.
ProShares Ultra VIX Short-Term Fut ETF (UVXY)
The ProShares Ultra VIX (UVXY) seeks to replicate, net of expenses, twice the return of the S&P 500 VIX Short-Term Futures index for a single day. The index measures the movements of a combination of VIX futures and is designed to track changes in the expectation for one month in the future. The VIX is a commonly followed measure of the expected volatility of the S&P 500 over the next 30 days. However, since VIX is not directly invest-able, exposure to equity volatility is often obtained though VIX futures.
The UVXY is looking particularly juicy as a covered call play because it's trading at all time lows.
There are risks involved in trading UVXY, These types of investment instruments are fundamentally flawed in our opinion. Leveraged ETFs offer 2X or even 3X the DAILY return of a particular sector or index. We emphasize “daily” because over time, it is a mathematical certainty that unless there is a pure sustained trend in one direction for an infinite period of time (what comes up must come down), the value of your holdings will decrease over time due to leveraged ETF daily re-balancing.
With that said, we don't recommend this as a long-term strategy, but rather more of an intermediate time frame. With the UVXY so low right now, we could see a spike in volatility as the summer continues and the market continues to trade in a choppy fashion.
Our recommendation: The best opportunity right now is to buy underlying shares of UVXY and sell deep out-of-the-money calls. Right now the July 20th $15 Strike, which expires 27 days from the date of this article, are trading at $1.00 a contract right now. That's a pretty nice 10% return for only 27 days. In fact, you could make up your entire investment in the underlying shares in just 10 months doing this, (assuming that you could get the same options premium every month). In this 10 month scenario, shares could go to $1 and you would be even, and any covered calls you sell after that would be profit. However, with this strategy you're bound to run into some high volatility at some point, and the underlying shares could trade up past the strike price of the calls you sold. In this scenario, you'd be up 50% in the underlying stock plus the options premium that you already made selling the calls. It's a win-win strategy. Note that if you wait to sell your covered calls on a day when volatility is up, you will get a better premium.
MASTERY Bottom line:
There are pros and cons to writing covered calls. In theory, this strategy will out perform outright stock ownership if the stock price declines, remains the same, or slightly increases in price. The principal disadvantage of this strategy, on the other hand, is that profit potential can be limited if the underlying stock price advances sharply.
Best of the Blogs
Scanning and identifying the best blog entries every hour
- In Financial Markets "Be Like Water" (Video) | ZeroHedge
- Walls, Going Viral | ZeroHedge
- Wikileaks Releases Part 16 Of The Podesta Files: Total Is Now 26,803 Emails | ZeroHedge
- Former Haitian Senate President Calls Clintons "Common Thieves Who Should Be In Jail" | ZeroHedge
- Opportunity Grows in Indonesia as Tourism Sector Blooms | Financial Sense
- Which Would Be The Better Economist Cover? | ZeroHedge
- Monopoly AT&T Plan Will Further Control the Internet, Content | ZeroHedge
The most relevant financial news and articles from the Internets
- The 20 college majors that lead to the most satisfying careers | Business Insider
- Traditional banks may be in trouble due to digital banking | Business Insider
- Credit cards are going the way of fax machines | Business Insider
- A tiny region of Belgium could bring down a major European... | Business Insider
- I saved 50% of my income for a month and the hardest part wasn't cutting back my spending | Business Insider
- A heart doctor reveals what everyone gets wrong about CPR | Business Insider
- Why you should stop letting your dog lick your face | Business Insider