ETF Trading Strategies
Short Selling
Short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. It is a form of reverse trading. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than the seller received on selling them. Conversely, the short seller will incur a loss if the price of the assets rises. Other costs of shorting may include a fee for borrowing the assets and payment of any dividends paid on the borrowed assets. “Shorting” and “going short” also refer to entering into any derivative or other contract under which the investor profits from a fall in the value of an asset.
Covered Call
A covered call is a financial market transaction in which the seller of call options owns the corresponding amount of the underlying instrument, such as shares of a stock or other securities. If the trader buys the underlying instrument at the same time as he sells the call, the strategy is often called a “buy-write” strategy. In equilibrium, the strategy has the same payoffs as writing a put option.
The long position in the underlying instrument is said to provide the “cover” as the shares can be delivered to the buyer of the call if he decides to exercise.
Writing a call generates income in the form of the premium paid by the option buyer. And if the stock price remains stable or increases, then the writer will be able to keep this income as a profit, even though the profit may have been higher if no call were written. The risk of stock ownership is not eliminated. If the stock price declines, then the net position will likely lose money.
Since in equilibrium the payoffs on the covered call position is the same as a short put position, the price (or premium) should be the same as the premium of the short put or naked put.
ETFs, because of their high liquidity, are more popular for writing covered calls than single-company stocks, which are seen as more likely to lose liquidity in bad market conditions. The top ETFs, such as QQQ, enjoy very high trading volumes, and so investors perceive them as excellent resources for hedging and other risk-mitigating strategies.
Going Long-term
ETFs are an excellent choice for a long-term investment strategy. They represent a basket of stocks from various companies making up an index. ETFs bring built-in diversity to a portfolio and follow the major indexes, allowing your portfolio to branch out into a particular sector without needing to purchase a large number of shares.