| After the dramatic drop in the stock market over | | | | market and think we may have a flat, down, or |
| the past year many investors are looking for | | | | gradually increasing market (at best) then you |
| ways to invest that are less risky than being | | | | could be better off using the buy/write strategy |
| 100% long the market. The market has proven | | | | than being 100% invested in the market. |
| to be "too volatile" for many investors recently. If | | | | The buy/write strategy will usually produce better |
| only we could find ways to be invested and get | | | | performance than a fully invested long portfolio in |
| much of the upside in the market but have some | | | | declining markets, flat markets, or gradually |
| kind of "hedge" against declines in the value of our | | | | increasing markets. This strategy will have lower |
| investments and portfolios. Investors have looked | | | | risk/volatility as well. Increased market volatility |
| to indexed annuities, hedge funds, market neutral | | | | (like we have seen over the past year) actually |
| funds, and broker sponsored "structured | | | | increases the attractiveness of the buy/write |
| products" to try to get this ideal position of | | | | strategy because higher volatility leads to higher |
| benefitting from the upside in the market but | | | | premiums/prices for the calls we are selling. |
| somehow limiting their downside risk. | | | | Who should use this buy/write strategy? |
| Unfortunately with investing "there is no such | | | | Even though this is a relatively simple and safe |
| thing as a free lunch". You have to sacrifice | | | | strategy involving options it should still only be |
| something in order to get that downside | | | | used by experienced and/or active investors. |
| protection. What are you willing to give up to | | | | Other investors may be able to get comfortable |
| reduce the risk of your portfolio? Are you willing | | | | with it after doing some research and homework. |
| to give up 1) the upside of a rising market in | | | | It will require some careful monitoring of your |
| general? 2) liquidity? 3) low expenses? 4) simple | | | | increased number of positions and some active |
| investments that you can understand and track? | | | | trading on a regular basis to execute this |
| or 5) upside above a certain amount (like | | | | strategy. |
| 5%-10%) in the case of a sharp market rally? If | | | | Is there an easier way to use this buy/write |
| you chose #5 then the buy/write or "covered | | | | strategy? |
| call" strategy may be one for you to consider. | | | | Yes. There is an ETF called the Powershares |
| What is the buy/write investment strategy? | | | | SP500 Buy/Write Portfolio (symbol PBP) that |
| This is probably the most commonly used, simple, | | | | invests in the SP500 index and uses the buy |
| and most conservative investment strategies that | | | | write strategy. The fund writes calls on the |
| involve options. Most people think of options as | | | | SP500 index each month 1-month forward and |
| being risky and adding to the risk of your | | | | takes in the option premium into the fund each |
| portfolio. This strategy uses options to actually | | | | month. Anyone can easily use the buy/write |
| reduce the risk in your portfolio. It is a "defensive" | | | | strategy with this PBP exchange traded fund. This |
| option strategy. It involves buying/holding a stock | | | | fund does all the buying and call writing/selling for |
| and "selling" a call option on the position your | | | | you. |
| already own. You can do this with individual stocks | | | | Performance of this Buy/Write Strategy and the |
| or exchange traded funds (ETF's). | | | | PBP Fund? |
| By selling an option on the stock/ETF you already | | | | How has this Buy/Write fund (PBP) performed |
| own you collect the option premium and you are | | | | relative to the overall market as defined by the |
| taking in money. If the price of the stock/ETF | | | | SP500 index? The Buy/Write fund clearly has |
| goes down, or stays flat, or only goes up a little | | | | outperformed in down markets. In 2008 it |
| bit during the time of the option (often 30-60 | | | | declined about 20% less than the overall stock |
| days) you get to keep the option premium and | | | | market (it went down 80% as much). How about |
| you are better off than if you had not used the | | | | in recent flat markets? This fund also tends to |
| option strategy. If you keep doing this every | | | | outperform in flat markets. What about in |
| 30-60 days over the course of a year you will | | | | booming markets? This Buy/Write fund provides |
| keep collecting options premiums and it can add | | | | you with gains, but lags the market when the |
| significantly to your annual returns. | | | | market is moving quickly and significantly upwards. |
| When should I use the buy/write strategy? | | | | That is what you are giving up with this fund. |
| The downside of this strategy is if the market (or | | | | How risky is the Buy/Write Fund relative to the |
| your stock/ETF) takes off and zooms quickly and | | | | overall stock market? The risk of the PBP as |
| significantly upward. In that case you will still make | | | | measured by standard deviation (volatility) of |
| money but your gains will be limited or capped at | | | | returns over the past 17 months has been 23% |
| a medium amount in the short term. If you are | | | | less than the US stock market (SP500). The fund |
| very bullish and 100% confident on the market or | | | | declined about 80% as much (20% less) than the |
| on your investment positions you would not want | | | | market in 2008. The fund is about 20% less risky |
| to use the buy/write strategy because it will limit | | | | volatile than the overall US equity market. This |
| your gains on any sudden significant increase in | | | | buy/write fund has reduced volatility relative to |
| prices. If you are not 100% confident in the | | | | the overall equity market. |