Can Your Period Be On And Off Or Consistant Flow Options Trading Strategies – How To Generate Cash Flow on Exchange Traded Funds

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Options Trading Strategies – How To Generate Cash Flow on Exchange Traded Funds

In this strategy we are going to review is the concept of writing covered calls to generate income.

Covered call writing consists of selling call options against your existing stocks. To implement the strategy, you must first own ETF shares and then sell 1 call for every 100 shares you own. In this action, you receive a cash payment up front because you give someone else the right to buy your ETF at a certain price at a certain time.

When you combine this strategy of writing covered calls with ETFs, you create an efficient way to generate consistent cash flow from the stocks you own, a way to reduce the cost basis of your investments, and a way to ensure that your money is always working for you.

Let’s apply this strategy to the iShares CDN Large Cap 60 Index Fund (XIU)

In this case, XIU is trading at $12.50 per share. Through your analysis, you predict that the market will be range bound for the next 4 months. With a bullish range of $13.50, our goal is to generate some income while we wait for the markets to turn around.

Looking at the $13.50 4-month covered call, it offers $0.55 cents per share. If we bought 1,000 shares of XIU at $12.50, it would cost us $12,500.00. We then sell 10 calls against XIU stock and generate $550.00 in cash flow income.

This $550.00 represents an upfront 4.40% guaranteed cash flow. Real money you earned today!

We received this money because we are giving someone the right to buy our XIU shares at USD 13.50 in the next 4 months.

Let’s look at different results – we originally bought 1000 shares at $12.50 for a total of $12500. We then sold 10 calls and generated $0.55 cents per share or $550.00 in cash flow, creating a new discounted average cost of $11.95 or $11,950 in net debit.

Should XIU rise above the $13.50 level by the end of the 4 months, your shares will vest and you will sell your shares at this strike price of $13.50 or $13,500

This represents $1,550 in profit over your adjusted cost basis, representing a nearly 13% return in just 4 months!

Alternatively, if XIU goes below $13.50 at the end of 4 months, you will continue to own XIU shares while retaining 4.40% cash flow. While creating a new adjusted cost basis, you are now free to write new covered calls.

The second strategy we’ll review is the principle of selling ETF income-generating investments.

Selling puts is a great way to generate cash flow in your portfolio and a good way to lower the average cost of your existing ETF positions. Plus, it’s a great, alternative way to shop the market.

What does it mean to sell a stake?

When you sell a put, you get paid cash up front because you give someone else the right to sell you shares at a certain price during a certain period of time. You would sell 1 put for every 100 shares you are willing to hold.

Let’s apply this strategy again to the iShares CDN Large Cap 60 Index Fund (XIU). Again, XIU is trading at $12.50 per share. Through your analysis, you predict that the Canadian market will be range bound for the next 4 months. With a low range of $12.00 or about 4% below today’s market.

Our goal is to generate some income while we wait for the markets to turn around. Looking at the 4-month strike at $12.00, it offers $0.87 per share. If we sell 10 put shares, that would generate cash flow of $870.00 because we would have to buy 1000 shares at that price of $12.00.

This represents a 7.25% cash flow yield because you were obligated to buy XIU shares at $12.00 over the next 4 months. If you are assigned to XIU, you will now own 1,000 shares at an average price of $11.13 per share. This represents a $12.00 purchase price minus a $0.87 cash flow.

This is a reasonable way to average out your existing positions or use it as an entry strategy to accumulate new ones.

However, if XIU trades above the $12.00 price at expiration, the sell offer will expire. You will keep the profit and have no further obligations.

In summary, covered call writing and put writing are excellent and conservative strategies for generating consistent cash flow in a portfolio. The best of all covered calls are eligible in registered accounts. While recording sales is limited to standard margin accounts.

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