Top Picks 2016: Powershares Buywrite ETF
01/28/2016 7:00 am EST
US stocks were range-bound in 2015 and there are investment strategies that make money from trendless markets, explains Nicholas Vardy, editor of The Alpha Investor Letter.
One such strategy is a buy-write option strategy. This involves buying a stock or a basket of stocks and then selling or writing call options on those same assets.
In doing so, the portfolio generates additional monthly income from the premium collected on the sale of the call option.
If the market stays flat or declines slightly, investors keep the premium and their stock.
If the market rises, investors only receive the premium and the stocks are sold at the price that was agreed upon in the covered call. As such, the strategy underperforms in bull markets, but outperforms in flattish markets like the current one.
Of course, you can buy stocks and sell options against them directly. Fortunately, there is an easier solution.
The Powershares Buywrite ETF (PBP) is an exchange-traded fund that writes call options against the US stock market.
Specifically, the fund tracks the CBOE S&P 500 BuyWrite Index, which measures the performance of a hypothetical buy-write strategy on the S&P 500 Index.
This is hardly a recommendation that will shoot the lights out. But with stagnant earnings, the prospect of rising interest rates, and a technically flat market, it is time to focus on capital preservation more than trying to swing for the fences.
So buy the Powershares Buywrite ETF at market and set your stop at $18.00.