Unconventional Income Trade Yields Great Results

The combination of a low-volatility environment and being in the thick of earnings season can require some creativity in the hunt for option premiums. One solution is to trade exchange-traded funds (ETFs) to avoid some of the single-stock risk associated with earnings announcements.

While not all ETFs provide enough premium to be attractive to option sellers, there are a few that do.

For instance, we regularly trade SPDR S&P Biotech ETF (XBI) in the Income Masters program. In fact, we’ve booked four winning trades in a row on XBI since mid-April, generating a total of $185 in cash with just one contract sold.

VanEck Semiconductor ETF (SMH) is another one we trade. Although due to the high price point, we tend to use bull put spreads to lower our capital requirements and boost our returns.  

But our most interesting ETF trade of late has definitely been on the ProShares Ultra Bloomberg Natural Gas (BOIL) in Option Income Weekly.

This fund tracks the return of a futures-based natural gas index, attempting to deliver a 2x return on a daily basis. So, if natural gas futures move 3% on a given day, BOIL should move around 6%.

On July 25, with the ETF trading at $64.63, we recommended members sell to open the BOIL 18 Aug 50 Put for $0.95, or $95 per contract, in income. And we set a target exit price of $0.50.

We noted at the time that BOIL was definitely more aggressive than our typical Option Income Weekly trade and that those who were uncomfortable with it could take a pass. However, we felt confident given that our strike price was more than 22% out of the money (OTM) and the put had an -0.11 delta.

Generally, we like to sell put options with a -0.15 to -0.20 delta, as the lower the delta, the higher the probability of the strike finishing out of the money. So, this trade was attractive from a risk-reward perspective even given the riskier nature of the underlying fund.

Those who were willing to take this more aggressive trade saw their courage rewarded, but they did have to stomach some volatility first.

Natural gas prices fell after we entered the position and BOIL fell even more, hitting a low of $53.81 on Aug. 2. While the quick drop may have rattled some, our put strike remained 7% OTM even at the low. 

As you can see above, BOIL reversed off that low, running up quickly. By Aug. 7, shares were back above $64 and the premium on the put we sold dropped below our target exit price.

We exited the trade for $0.19, booking a profit of $0.76, or $76 per contract, for a 1.5% return in less than two weeks.

The next day, we turned around and sold a new BOIL put. This one was also around 20% out of the money, providing us with a nice cushion given the big swings the ETF is prone to.

While trading a leveraged ETF may be a bit unconventional, we do what we’ve got to do to find income in this low-volatility environment. And, so far, it’s been working!