Protecting Your Profits if Markets Wobble
01/18/2010 1:00 pm EST
Bryan Perry, editor of Cash Machine, says covered call writing can protect profits from the market rally, and he recommends a closed-end fund that does it.
Sure, the market has enjoyed a monster "V-shaped" rally off the March 9, 2009 low and hasn't looked back since. And while the Standard & Poor’s 500 might make its way up another 5% to 1,200 in the short term, those assets that have made parabolic moves higher deserve to be collared to protect profits and provide some downside insurance.
The most common way to insulate profits while still staying long the market is to sell covered call options against existing positions.
You can sell one call option against [every 100 shares of stock owned], which gives a buyer of that call the right to acquire your 100 shares of stock at a set strike price, preferably at or higher than where its currently trading. In doing so, you bring in real cash or option premium.
Selling calls against the position takes advantage of stocks that are “trading ahead of themselves” and can really hop up your income stream to your portfolio by an additional 5% to 10% annually.
In keeping with this month's theme of selling covered calls, I'm adding the BlackRock Global Opportunities Equity Trust (NYSE: BOE).
BOE is a perpetual closed-end equity fund that began operations in May 2005. The primary objective of the fund is seeking current income and gains, with a secondary goal of long-term capital appreciation.
Typically, the trust invests about 80% of its total assets in equity securities, including common stocks, convertible securities, preferred stocks, warrants, depository receipts, and equity interest in REITs; options on equity securities; indices; or sectors of equity securities.
Currently, BOE is throwing off a highly attractive 11%+ current yield from the selling of covered calls on roughly 56% of its portfolio. This leaves plenty of room for capital appreciation from the 44% of the portfolio that is not hedged.
BOE has been paying out the same quarterly dividend of $0.56875 per share since November 2007, all through the worst of what the stock market endured. And it even paid out an additional special dividend of 80 cents at the end of 2007, a rare event in the toughest of times for fund performance.
With 73% of the fund in large-cap ($10 billion to $20 billion) multinational stocks, BOE is in my view, poised for another very strong year, because the financial sector is seeing strong rotation of money flow into it.
Currently, BOE is trading at less than 1% premium over its net asset value (NAV) and has about a quarter of its holdings in financials, which should translate into strong near-term performance. Along with financials, BOE is also invested in information technology, energy, health care, and consumer discretionary [stocks].
I recommend that you buy shares of the BlackRock Global Opportunities Equity Trust up to $21 in order to lock in a double-digit yield. (It closed above $20 Friday—Editor.)