Converting High Volatility ETFs to Conservative Cash-Generating Positions: A Real-Life Example with Global X Lithium & Battery Tech ETF (NYSE: LIT)


The covered call writing and put-selling premiums we receive are directly related to the implied volatility (IV) of the underlying securities. This is true of both stocks and exchange-traded funds (ETFs). How do we manage elite-performing securities that generate extremely high returns for near-the-money strikes? In other words, can we use these securities and mitigate the risk of the high IV? Of course, the answer is “yes” or I wouldn’t be writing this article. On January 18, 2021, Barry R. wrote me an email:

Alan,

I am evaluating new stock purchases to sell calls on.

The list is limited because of earnings reports. I evaluated ETFs.

ICLN strike 30 has ROO 6.8%.

PBW strike 120 has ROO 7.8%.

LIT strike 68 has ROO 6.4%.

YOLO strike 22 has ROO 9.1%.

These are all for exp 2/19.

This doesn’t make sense that the ROO is so high.

What am I missing?

Barry R

The ETFs Barry was alluding to were taken from our premium member ETF Report dated 1/13/2021.

 

Premium member ETF Report showing the IV of the 4 ETFs

 

ETF Report Dated 1/13/2021

 

Note that the IV of the 4 ETFs range from 56.92 to 73.56 (brown cells) while that of the S&P 500 is 18.35 (blue arrow).

 

Mitigating risk with in-the-money call strikes

Let’s turn to the 1-month option-chain for LIT ($68.30):

 

LIT Option-Chain on 1/18/2021

With LIT trading at $68.30, we will look to target a deep in-the-money strike that will generate a significant 1-month initial time-value return while simultaneously offering compelling downside protection of that time-value profit and lowering the breakeven to a comfortable level. In this case, we will calculate the returns for the $61.00 strike.

 

LIT calculations using the Ellman Calculator

 

LIT: Initial Returns and Protection

 

Using the $61.00 deep in-the-money strike still generated a 1-month initial time-value return of 2.3% (yellow cell) with downside protection of 10.7% of that time-value profit (brown cell). The breakeven is lowered from $68.30 to $59.60.

 

Discussion

Mastering the 3-required skills for option-selling will give us the ability to convert potentially risky trades to more defensive positions while still generating significant time-value returns. In this case with LIT, we used a deep in-the-money strike to position ourselves favorably in both areas.

 

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Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:

Hello Alan and team!

Today’s email alert about adding additional implied volatility information to our stock reports is exciting- the benefits of being a BCI Premium member just keeps getting better!

Thank you,

Jim

 

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Covered Call Writing with Invesco QQQ Trust (Nasdaq: QQQ)

Multiple Applications

Weekly and monthly cash flow can be generated by selling call options against shares of large-cap technology companies. QQQ is an exchange-traded fund consisting of 100 of the largest non-financial companies listed on the Nasdaq exchange and frequently an outstanding security for option-selling.

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Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.

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