Thursday, July 26, 2007

One Approach for Volatile Sideways Markets

About two months ago, I talked about three different buy-write products (two closed-end funds and an exchange-traded note or ETN) which are designed to mimic a strategy of writing covered calls, such as is tracked by the CBOE S&P 500 Buy-Write Index (BXM.)

I was being a little cheeky when I suggested that this index might be useful as a market timing tool. Instead, I figured that the best application of a buy-write strategy would likely be as a cash equivalent of sorts, particularly for those who were looking for a place to park their money somewhere that it could earn a reasonable return in a volatile sideways market, yet participate in any unexpected upward moves.

I think we may be in just that market environment right now.

If you are worried about the RUT falling through its 200 day SMA today and most of the other major indices penetrating their 50 day SMAs, then perhaps you should take a long look at the BEP, MCN and BWV. I am slightly partial to the BWV, because, as an ETN, it will not have (taxable) distributions. There has been very little volume in BWV in the two months it has traded, but with a typical bid-ask spread of 0.10, it is competitive with the more liquid BEP and MCN at least on a small scale.

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