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Individual stocks have a drawback in that they can be quite volatile. That’s why people created mutual funds, indexes, and exchange traded funds (ETFs) — to help smooth out the single stock volatility. ETFs are baskets of securities that trade like a single stock. Because they have options available it is possible to use them for covered calls. The inherent diversification they provide usually makes them a less volatile security than individual stocks. If one of the stocks that is part of an ETF drops suddenly then the effect will be felt less by the ETF that contains that stock than by the stock itself.

ETFs that track specific indexes allow you a convenient way to trade the index. For example, the Russell 2000 index can be traded through the ETF with symbol IWM. There are two thousand stocks in IWM so by definition it has no single-stock risk. Other popular ETFs with many constituent components include QQQQ (NASDAQ 100) and SPY (S&P 500). Or, if you want something that follows specific sectors, countries, or commodities, you can do that with ETFs, too. For example, XLF tracks financial stocks, EWZ tracks Brazil, EWJ tracks Japan, and GLD tracks the shiny yellow metal.

The most common way to own gold is with the ETF symbol GLD. Billions have been invested in it. Although it doesn’t pay dividends, by using covered calls you can create dividend-like cash from GLD, too. You can purchase any one of several gold-based ETFs (although the most logical choice is GLD) and then write call options against it. Other choices (besides GLD) include DGL which has fairly small open interest, and UGL which is 2x leveraged and therefore quite volatile. Given the liquidity of GLD, and the large open interest in the options for GLD, the best choice for gold covered calls is GLD.

Much like gold, investors should always have some exposure to emerging markets for better diversification. That is especially true considering the volatilities in the forex markets. But emerging markets information can be inconsistent, hard to come by, and in a format that is difficult to digest. So it’s another good opportunity for ETFs. The most common emerging markets ETF is the iShares MSCI Emerging Markets Index Fund (EEM), which has nearly $40 billion invested in it. It is highly liquid, which is an attribute you want to see when investing in general, and specifically when selling covered calls. Another choice, if you want to limit your exposure to just China, perhaps, would be to use iShares FTSE/Xinhua China 25 (FXI) instead.

Despite all the benefits of using ETFs for covered calls, there is one kind of exchange traded fund that you should not get involved with, and those are the leveraged ETFs. They are 2 or 3 times more volatile than a their unleveraged counterparts. You can recognize leveraged ETFs because they usually have words in their name like “double”, “2x”, “ultra”, “triple”, “3x”, or “leveraged”. Traders who day trade love leveraged ETFs. Good for them. But that does not mean they are appropriate for covered calls written by conservative income-oriented investors (they’re not!). They can be tempting because the high premiums they offer. But the extreme volatility is the reason for those high premiums! Better to stick with unleveraged ETFs for writing covered calls.

For more information about covered calls, check out Born To Sell. Visit Born To Sell where you can see a stock option screener at https://www.borntosell.com/options-screener and how it can help you make more money.