Thank you for the reply!
I would not have thought to ask my broker if they have a
buy-write commission. I'll check into that before getting
started. The CBOE site was my first look to check contract
volumes and they have some interesting spreadsheets
available. Thanks again for the lead.
Thanks for the kind words regarding the book (Create Your
Own Hedge Fund).
Yes, volume plays a role. It's much easier to trade when
contract volume is high, rather than almost nonexistent. And
that's even more true if you decide to close, or roll, a
position prior to expiration.
But there is more to the answer. If the bid-ask market is
tight, then you can get your order filled at a reasonable
price, regardless of volume. The problem is that many of
these indexes have so little volume and bid-ask spreads that
are so wide that it's almost impossible to get a decent
fill. In those situations, selling at the bid price is
seldom desirable. All you can do is enter your order at a
price you are willing accept and wait to see if it is
filled. But that presents a serious problem. If you buy
your ETF first (and most brokerage firms will not allow you
to sell your call option before you own the underlying stock
or ETF) and then enter an option order, that option order
may not get filled at your price. Or the market may head
lower, in which case you would have no chance to sell your
call. Thus, it is far better to adopt a covered call
writing strategy using options that have some volume.
By the way, one way to avoid the pitfalls mentioned above is
to adopt the equivalent uncovered put writing strategy (as
described in the book). If you enter an order to sell the
put and if it goes unfilled, nothing is lost - except
opportunity. If you own the ETF and fail to sell your call,
you would be long the ETF and subject to market risk. If
selling puts makes you uncomfortable, then stick with
covered calls. If your broker won't allow selling those
naked puts, get another broker (deep discount).
There is one other possible solution, but be certain your
broker does not charge an excessive commission to do this
for you. You can enter the buy-write as one order. In
other words, you give the debit you are willing to pay to
buy the ETF and sell the call. It's a combination order -
you either get filled on both legs, or neither. You would
not have any risk of owning only the ETF and not being able
to sell the call. Some brokers do that for no extra charge,
others don't. So ask if you can enter that order and still
pay online rates (I assume you want to trade online and not
spend the mucho bucks to speak with a live broker).
To answer the final question - 'is it important?' - the
answer is a qualified 'yes.' It's important, but not
critical. There are many ETFs which offer options to trade,
but the ones with the best volume are the easiest to trade.
Because covered call writing is a bullish strategy, you
certainly want to only own those ETFs that interest you -
i.e., you may prefer large caps, or small caps, or specific
sectors, etc. You can, of course, simply choose the ETFs
with the best option volume - but ask yourself if you really
want to own those specific ETFs.
Here is one place to find ETF volume (not option volume):
Go to www.amex.com
In left-hand column, click on the + sign next to ETFs
In the drop down menu, click on Market Summary
There now appears a table of all the ETFs with volume.
It's likely the more active ETFs have more option volume,
but it is no guarantee.
I have been unable to find a tabulation of volume for ETFs,
but the best advice I can offer is to go the the CBOE site
(http://www.cboe.com/delayedQuote/QuoteTable.aspx) and check
the open interest in the last column. The higher the OI, the
greater the average daily volume. FYI, I trade some of those
options with little or no volume, but it makes my life more
Best of luck and let me know when you get started with this
Hi Mr. Wolfinger:
Your book is incredible. I'm just about geared up to
implement a covered call strategy with ETFs. I wonder if
contract liquidity plays a role and where I can go to see
which EFT’s have options with the most volume? Any
suggestions on how to get a bigger picture of contract
liquidity? Is it even important?