How to Set Up a Portfolio of Nasdaq and S&P 500 Stocks in a User-Friendly Approach – May 10, 2021
Covered call writers and sellers of cash-secured puts know the importance of portfolio diversification. If one security under-performs, the others can compensate. This article will demonstrate how to craft a portfolio of large-cap tech and blue-chip companies for our option-selling strategies.
Strategy goals
- Portfolio mix of blue-chip and technology companies
- User-friendly system
- Broad diversification
- Initial 1-month time-value return goal range of 1% – 3%
Large-cap technology companies
We will use the Invesco QQQ Trust (NASDAQ: QQQ) which consists of 100 of the largest non-financial companies listed on the Nasdaq exchange (MSFT, AAPL, AMZN, FB, INTC etc.). One security will represent a broad diversification of quality technology companies.
Blue-chip companies
We will use the best-performing Select Sector SPDRs which divide the S&P 500 into 11 sector index funds that each trade as stocks:
- Consumer Discretionary (XLY)
- Consumer Staples (XLP)
- Energy (XLE)
- Financials (XLF)
- Health Care (XLV)
- Industrials (XLI)
- Materials (XLB)
- Real Estate (XLRE)
- Technology (XLK)
- Utilities (XLU)
- Communications (XLC)
Evaluating the price performance of our securities
We can create a comparison chart for QQQ versus the S&P 500 in 1-month and 3-month time-frames and check the Select Sector SPDR Tracker also for 1- and 3-month price performance (as of June 2020):
Real-life calculations with a 1% – 3% monthly initial time-value return goal range
Using a portfolio consisting of QQQ, XLK, XLU and XLV, the multiple tab of the Ellman Calculator shows an average 1-month initial time-value return of 2.4% (yellow field) with an additional upside potential component of 0.4% (brown field):
Discussion
A practical way of selecting blue-chip S&P 500 stocks is by locating the top-performing Select Sector SPDRs. Similarly, a time-efficient way of incorporating tech companies into our option-selling portfolios is by using the Qs. An initial 1-month time-value return goal range of 1% – 3% is reasonable using slightly out-of-the-money strikes.
Author: Alan Ellman