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 once named closed-end funds as one of his favorite “no brainer” kinds of investments.
And early last year, hedge fund manager Boaz Weinstein launched 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. Discounts of 10% are common. And occasionally, you’ll see discounts of 20% in certain assets.
In my newsletters, I’ve recommended a special closed-end fund. It’s a “one click” way to put one of my favorite investment strategies to work in your portfolio…
This closed-end fund 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 from 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, which generate even more income.
It’s called the Eaton Vance Enhanced Equity Income Fund (EOI). It’s trading at around a 6% discount as I write. And 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, less risk, and steady stocks over high-growth investments.
And when you look at the numbers, the benefits of the covered-call strategy are clear.
For example, the CBOE S&P 500 BuyWrite Index tracks the results of buying the S&P 500 Index and then selling the next expiring call with a strike price just above the index’s price. Right now, this index yields 4.9% compared with just 1.9% 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 stock. 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 (called the “underlying”), by 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. He agrees to buy the stock from you at that price, but it’s his option to exercise or not.
When you sell covered calls, 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 stock market took a wild ride recently. On February 5, the Dow Jones Industrial Average lost nearly 1,200 points, or about 4.6%.
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.
So if you’re worried about the market, this is a perfect time to use this strategy. It’s a great way to protect your portfolio from a potential decline… and still profit from the upside in stocks.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig
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Source: Daily Wealth