I usually do not write about option strategies, but I have decided to write about selling call options for XLF, and also some technical trading information for those of you who are interested in more active portfolio management. Covered call writing is really only a little more active than outright individual stock ownership, and provides income.
It will be interesting to see if the financial related index, XLF, is able to remain where it is right now since this is a short term support level dating back to July 29, 28 and 17. On a daily chart, I see that the MACD has crossed below 0, a bearish sign, but the volume has been lower since the high positive volume week of July 14, and it has stayed in the current trading range. Moreover, there has been a lot of negative news the past few days regarding Fannie Mae and Freddie Mac, and the XLF has remained above the $19.51 support, which was the low on July 17. An interesting covered call would be to buy the XLF around the current price of $19.82 and sell the September call option for $1 with a strike of $20 for a 5% return in 31 days. The basis for the XLF would be $18.82 in this case, which is not the bottom if it does not hold here, but certainly closer to the previous low of $16.77 on July 15. If you think it will not hold above the $19.51 current short term support level, which is certainly possible, another interesting strategy would be to sell the September call with a $19 strike for $1.60. If the XLF is below $19 on September 19, the return would be around 8% in 31 days, and if it gets called, the return would be around 3.6%. The basis would be $18.30. These numbers are changing as I type, but the returns are about the same even with some price fluctuations due to the risk associated with the financials.
I like the XLF because the diversification of the ETF reduces the risk. While the XLF may need to retest the $16.77 low, these trades look appealing for someone who can wait out some of the recoveries following September 19 if they do not get called.