How to Generate Income from Market Volatility

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

One could argue that current markets both in the United States and abroad are trading as if volatility won’t rear up again at some point. The CBOE Volatility Index (VIX) is trading down near its historic low, currently at a reading of 12.00. It’s as if there will never be another Ebola breakout, a major incursion in an eastern-bloc country by Russia, an unraveling of the Middle East in the wake of the growing presence of ISIS, another terrorist event on U.S. soil, another major natural disaster like that of Katrina, another flash crash or some other black swan situation that is systemic.

While the market may be turning a blind eye to potential downside risk, it isn’t doing so without wide daily and weekly swings in the indexes, most of which are contained before the market pushes higher. As this looks to be a pattern that may be sustained for the foreseeable time, investors looking for outsized yield on their investable capital should consider a well managed closed-end fund that utilizes a smartly run buy/write strategy to sell covered calls against a fundamentally strong stock portfolio as a way to participate in the market rally while generating income.

While the level of volatility will rise and fall with global events, the business of capturing option premium from market volatility is a constructive strategy employed by savvy investors who look to enhance total returns by being busy selling covered calls on existing portfolio holdings. Like any strategy, some investors and fund managers are more adroit about successful covered-call investing, as timing when to sell calls plays a huge part of a winning strategy. Then again, timing is a key component to any investing strategy.

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A current holding in Cash Machine that has been consistently delivering strong income from a good-looking equity portfolio is the Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG), paying out a current yield of 9.7% on a monthly basis. It’s one of the larger buy/write closed-end funds, with more than $3.2 million in assets with a total expense ratio of 1.07%.

What makes shares of EXG attractive at the present time is that they trade at a -5.8% discount to Net Asset Value and own a terrific portfolio of 87 holdings of which the following stocks are the largest positions:

Google, Apple, Nike, Home Depot, Prudential, Anheuser-Bush InBev SA, Medtronic, Roche Holding AG, Imperial Tobacco PLC, NXP Semiconductors, NV and Compass Group PLC

Roughly 55% of the fund’s portfolio is invested in U.S. equities, with the majority of the balance spread among Europe and Asia. It’s a very attractive way to own a balanced portfolio that provides both strong income and upside appreciation potential.

Shares of EXG have returned +10.6% so far for 2015; that includes both gains in share price and monthly distributions. This is about twice the performance of the major averages year to date and goes to show how when a market is stuck in neutral or lagging, one’s capital need not be. With foreign markets posting better year-to-date performance than those of the U.S. indexes, having some exposure to what’s performing best is in every investor’s interest. However, stock picking can be risky, and most exchange-traded funds (ETFs) don’t pay out any sort of decent yield.

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Having a few closed-end funds in one’s income portfolio that provide foreign and emerging-market exposure where an active buy/write program is at work makes good investing sense in the current market, and EXG is one way to fill that role.

In case you missed it, I encourage you to read my e-letter column from last week about how high-income investors can take advantage of economic data misses. I also invite you to comment in the space provided below.

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Last week was a flat-to-negative one for U.S. and global stock markets. The Dow Jones fell 0.22%, the S&P 500 rose 0.16% and the NASDAQ gained 0.81%. The MCSI Emerging Markets Index pulled back 0.95%. Big gainers in your Bull Market Alert portfolio included Regeneron (REGN), which powered up 5.09%; ProShares Ultra Nasdaq Biotechnology ETF (BIB), which jumped 4.90%; Ambarella Inc. (AMBA), which gained 4.78%; and Integrated D

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