A Cash-Plus Investment for a Range-Bound Market

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

U.S. markets recovered slightly last week with the Dow Jones rising 0.60%, the S&P 500 up 0.67% and the NASDAQ eking out a 0.09% gain. Global stock markets continued to struggle, with the MCSI Emerging Markets Index tumbling 2.12%.

Your position in Infoblox (BLOX) gained 3.74%.

Your position in Vipshop Holdings Limited (VIPS) stopped out at loss, as it traded a mere 10 cents below its stop price.

U.S. stocks have remained range-bound in 2015. On Friday, the S&P 500 closed at the same level as it first did on Feb. 13.

There are investment strategies that make money from trendless markets. 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 U.S. 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.

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This is hardly a recommendation that will shoot the lights out. But weak seasonality and the prospect of rising interest rates in a technically flat market means that this is a time to focus on capital preservation more than trying to swing for the fences.

So buy the Powershares Buywrite ETF (PBP) at market today and set your stop at $20.25.

Portfolio Update

iShares MSCI Hong Kong (EWH) lost 2.45%. EWH once again fell subject to China’s shenanigans after the government’s regulators further devalued the yuan. Currency devaluations such as these can boost exports. However, this can also lead to inflation and slow economic growth. EWH typically trades around four million shares on any given day, but confused traders pushed nearly 21 million shares of EWH back and forth on Aug. 12. EWH is a HOLD.

Avago Technologies Limited (AVGO) dipped 0.48%. Tech stocks had a mixed week last week as many names drifted sideways on low conviction. AVGO will announce earnings next week on Aug. 26 after markets close, and the analysts’ consensus estimate is $1.94 earnings per share (EPS). AVGO is a HOLD.

Infoblox (BLOX) gained 3.74%, closing the week on an upbeat Friday. This may push positive momentum into today’s trading. BLOX will report earnings on Sept. 3 after markets close. This networking firm supplies sophisticated networking solutions to more than 8,100 customers and specializes in technology that minimizes intervention by network admins and improves network security. BLOX is a BUY.

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Nicholas Vardy

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