Many people keep asking me how to pick an ETF for which to perform a covered call on and the answer to that question really depends on your financial situation, financial goals and perspective on the market. There is no blanket answer that will cover everyone’s situation but one of the key indicators I use is to look at the 52 week high/low of a particular ETF.
For ETFs that are hovering around a 52 week low, it may be an indication that the ETF may be falling out of favor for a variety of reasons and may drop significantly more. It may also mean that it is at a good buy value but there’s no way to be sure.
Conversely, an ETF that is trading at 52 week high may be an indication that the ETF has been overbought and is at its peak or perhaps has more room to grow.
In either situation, there is no way to find out if the ETF is about to drop even lower or go even higher so the best alternative is to look for ETFs that are trading above their 52 week low by at least 20% so if you look at the chart, you’ll find that SMH and XHB meet that criteria and XME and UNG are trading near their 52 week highs so they do not meet the criteria. Correction: I just noticed that the SMH on the report is an
This is not a hard rule but a general guideline. There are instances when a bull market may make it favorable to go after those ETFs that are near their 52 week high but I generally buy at a level 20% below their 52 week high on “bullish” ETFs (e.g. OIH).
I’ll post the 52 week range on the ETF-Cashinator report as a guideline from now on so hopefully this will help but remember that the report is a tool to help you BEGIN to do your own due diligence. I personally never buy an ETF that I’m not willing to own over a long term period (10+ years) and adhere to the rule “don’t own a stock for 10 minutes if you’re not willing to own it for 10 years” rule. Remember there are no guarantees in the stock market.
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