One of my favorite ways to invest in stocks and bonds “at a discount” is through closed-end funds.
And I’m not the only one…
Bond trader Jeffrey Gundlach recently named closed-end funds as one of his favorite “no-brainer” kinds of investments. Hedge fund manager Boaz Weinstein is starting a new fund just to take advantage of cheap closed-end funds.
A closed-end fund doesn’t have to redeem investor money… so it’s more protected against abrupt shifts in investor sentiment that can crash shares of exchange-traded funds (ETFs).
Instead, the fund raises capital, and then its shares trade freely in the market at a price independent from the assets it actually holds.
Those two prices, over time, tend to move in the same direction. But the difference can get quite large. Occasionally, you’ll see discounts of 20% in certain assets. Discounts of 10% are more common.
I just recommended a closed-end fund in my December issue of Income Intelligence that is a “one-click” way to put one of my favorite investment strategies to work in your portfolio.
It uses an options strategy called a “covered call” to generate income.
As a quick reminder, selling a covered call is a strategy that focuses on generating income on a stock that you already own.
The fund holds a diversified portfolio of 50-plus stocks, collects their dividends, benefits when their share prices rise, and uses its stocks to write near-dated covered calls to generate even more income.
It’s one of the easiest ways to invest in covered calls… without making a single options trade.
Covered calls work best for investors who favor current income, lower risk, and steady stocks over high-growth investments.
When you look at the numbers, the benefits of the strategy are clear.
The CBOE S&P 500 BuyWrite Index tracks the results of buying the S&P 500 stock index and then selling the next expiring call with a strike price just above the index’s price. Right now, this index yields 4.1%… compared with just 2% from the S&P 500.
That’s more than double the yield on the very same stocks.
And the great thing about this strategy is that you can put it to work on almost any stock that you already own…
For example, say you own 100 shares of a company’s shares. You like the business, but you would be willing to sell your shares at a certain price…
With a call option, you can agree to hand over your 100 shares of the stock (called the “underlying”), on a particular day (called the “expiration”), at a particular price (called the “strike price”).
This is known as “selling” (and sometimes “writing”) a call option… The call buyer pays you money (called the “premium”) today in order to enter the contract. They agree to buy the stock from you at that price, but it’s their option to exercise or not. They are the buyer of the option, and you’re considered the seller.
If you think about covered-call selling, you want your holdings to go up a little bit, but not too much.
That makes now an ideal time to learn this strategy. The bull market has run for seven years, and it’s likely that stocks will show lower returns for a bit.
A sideways-moving market… or even a market correction… is a great time to initiate a covered-call strategy. Selling covered calls lets you “earn your way out” of a position that’s in the red.
If you’d like to learn how to initiate this type of strategy on almost any stock that you already own, I’ll be hosting a live presentation this Wednesday night at 8:00 p.m. Eastern time. Click here to sign up and make sure you get your invitation.
- How to feel safe in stocks when the market seems dangerous.
- Something different: Could an alien megastructure explain the weirdest star in the sky?