Take Advantage of the Market Rout and VIX Spike With These 'Highly Liquid' Plays
When markets hit rare panic-button modes, I put dry powder to work via covered call orders in index and sector ETFs.
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Friday brought an appropriate and brutal end to a horrific trading week. All the major indexes dropped between 5.5% and 6% on the day. The Nasdaq entered official bear market territory and is now down 22% for the year. The S&P 500 is close to joining its tech-heavy brethren as it is down 17% for 2025, year to date. Notably the 10-Year Treasury yield ended the day at 4% for the first time since last October.
Carnage was everywhere this week with the iShares Semiconductor ETF SOXX plunging 16%, its worst week since 9/11. The S&P 500 was off 9%, its worst week since the initial Covid lockdowns in March 2020, with the VIX hitting the 45 level Friday for the first time since that era as well.
When the markets hit these rare panic-button modes, I tend initially to put dry powder to work via covered call orders in index and sector ETFs. This provides a huge degree of diversification and the options against these entities are highly liquid, meaning trades get executed instantaneously. In addition, when volatility spikes, option premiums on these "stodgy" instruments move nicely higher. This provides a nice bump both to downside protection and potential returns.
I put a solid portion of my cash to work late on Friday in these types of trades, both utilizing strike prices a bit below current trading levels. If nothing else, I will achieve significantly lower entry points if the market continues to sell off on positions I don’t mind holding over the long term. If markets stabilized, I will make a nice return with trades that have little to no company-specific risk. I will highlight both trades here.
Energy
Oil fell 7% on Friday on top of a similar decline on Thursday. This knocked The Energy Select Sector SPDR Fund ETF XLE down by more than 16% over the past two trading sessions. This sector ETF, whose biggest holdings are Exxon Mobil XOM and Chevron CVX, now trades at its lowest levels since June of 2023. XLE also now yields over 3.6%.
XLE Option Strategy
Here is how one can initiate a position in XLE utilizing a covered call strategy. As a reminder, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Selecting the December $75 call strikes, fashion a covered call order with a net debit in the $68.20 to $68.30 a share range (net stock price - option premium). Liquidity is excellent with the options against this equity.
This strategy provides downside protection of 15% over the trade’s duration, which includes two quarterly dividend payouts of $0.72 a share. This strategy also provides return potential of 12%, including dividends, even if the ETF trades down 5% over the option duration.
Russell 2000
Then we have the small-cap Russell 2000, which was the first major index to enter a bear market this past week. A good proxy for the small-cap index is the iShares Russell 2000 ETF IWM, which is now trading at its lowest levels since late 2023. My risk-mitigated trade on small businesses stabilizing at some time over the near-term horizon follows.
IWM Option Strategy
Here is how one can initiate a position in IWM utilizing a covered call strategy. Selecting the December $175 call strikes, fashion a covered call order with a net debit in the $158.60 to $158.80 a share range (net stock price - option premium).
This strategy provides downside protection of 13% over the trade’s duration, which includes two quarterly dividend payouts of $0.46 cents a share. This strategy also provides return potential of 11%, including dividends, even if the ETF trades down slightly over the option duration.
At the time of publication, Jensen was long IWM and XLE.
