As the markets have turned, many investors are looking at possible opportunities and different strategies to approach the market with exchange traded funds (ETFs).
A BuyWrite fund is a strategy that has been most commonly utilized by institutional investors. The method allows investors to buy a basket of stocks and then write covered call options on the holdings, explains Eric Rosenbaum for Index Universe.
During periods of flat or negative returns, BuyWrite funds tend to smooth volatility, while allowing investors to pick up some income from options premiums. The reason the funds weren’t as popular in recent markets is that during a bull run, the strategy can limit upside potential.
In essence, as BuyWrite strategy is considered conservative, as a writing options contract is involved and therefore, do not appeal to the masses. Investors that use this strategy say that the actual “smoothing” effect will be seen over a long period of time, to actually see the benefits. The major benefit comes from the premium generated from options writing.
PowerShares S&P 500 BuyWrite (PBP) is down 29.6% year-to-date.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.