ETF’s or Long Stock? Which should I trade? In my opinion, the short answer is yes. No, Both!
Recently, I was asked by one of our students here at OptionsAnimal whether I prefer to build a portfolio of ETF’s, equity’s, or both.
I think that there is a place for both in a portfolio. Certainly ETF’s are an attractive investment in that they can be bought and sold easily (look for high liquidity – at least 1 million sh/day), do not have the sharp moves that an individual equity can have (like an earnings event!), and still have options with them. Some of my favorite ETF’s are:
XLF
XME
XRT
EWZ
SPY (yup – that’s an ETF!)
EWY
IWM (the baby RUT…)
EEM
However, you’re most likely not going to see the same kind of movement that you will see with a stock. Take AAPL for instance – it has had a long solid move moving up more than 200% (since a low of 78.20 – intraday, 1/19/2009) from its low just over a year ago??? But not all stocks have moved like that.
So who do I like in the world of equities? Here are a few…
AAPL
NFLX
CAL (yup – an airline! There’s gold in them thar options! Great covered call candidate)
DAL (see above!)
X
BUCY (somebody’s got to make the equipment to get the materials out of the ground!)
So, I think that investing in ETF’s to cover broad market sectors is a good idea. They make decent covered call and collar trades. Not too sexy, but not too volatile either. Add in a couple of great stocks, and I think that you’ve got it!
As for sector diversification, I typically find that I am drawn to technology issues. They tend to have more movement potential. I am also into the materials sector. I don’t follow any specific “rule based” trading or diversification plans with the one exception of no more than 20% of the portfolios value tied to any one equity. For pure options trades, that number is a maximum of 2% risk of the entire portfolio.
Don’t know that I’ve cleared anything up for you, but that’s pretty much the way that I see it.
Jeff McAllister
OptionsANIMAL Instructor
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